At press time, there are 120,300 contracts worth $4 billion set to expire this Friday on major exchanges Deribit, CME, Bakkt, OKEx, LedgerX, according to data source Skew. Much of that amount can be found on Deribit, the world’s largest crypto options exchange by trading volume. It is on track to register a record monthly bitcoin (BTC, -4.1%) options expiry of 102,162 contracts (nearly $3.5 billion). 

A call option gives the holder the right but not the obligation to buy the underlying at a predetermined price on or before a specific date; a put option represents a right to sell. An out-of-the-money (OTM) call is the one with the strike price higher than the spot price. As of press time, call options at strike prices above the current spot price of $34,500 are OTM. Meanwhile, put options at strikes below the spot price are OTM as well.

Option expiries seldom have a direct impact on the spot price. However, when open interest is concentrated in out-of-the-money (OTM) call and put options, which is the case with bitcoin, a sudden pre-expiry move forces market makers to hedge with the underlying asset. That leads to more significant price turbulence.  

Over 80% of the Deribit-based Jan. 29 expiry open interest is set to expire out-of-the-money, or worthless. Notably, more than 52,600 call option contracts and 29,800 put option contracts are currently OTM, as noted by Swiss-based data provider Laevitas. 

See also: Trading Hall of Fame: The Bitcoin Options Bet That Made $58.2M Profit on Just $638K

“If BTC rapidly jumps to all-time highs within the next few days, it’s expected market makers will aggressively hedge their out-of-the-money short call option exposures, which would likely increase overall market volatility and momentum in the underlying price,” Samneet Chepal, quantitative analyst at the quantitative and systematic digital asset investment firm Ledger Prime, told CoinDesk. 

Market makers are individuals or member firms of an exchange that create liquidity in the market and take the opposite side of the transaction initiated by traders/investors. 

Given the recent strong bullish sentiment and massive buying in higher strike, out-of-the-money call options, market makers across the board are likely to be net short gamma (call sellers), according to Chepal. 

Options gamma is the rate that delta will change based on a $1 change in bitcoin’s price. Delta measures the sensitivity of options prices to the changes in the spot market price. 

Being short gamma means being an option writer (seller) regardless of whether call or put. In this case, market makers are short gamma due to call selling. That makes them vulnerable to a sudden move to the higher side. 

Therefore, if bitcoin rallies while heading into Friday’s expiry, the market makers may aggressively hedge their OTM short call exposure by taking a long position in the spot market, leading to heightened price volatility and stronger bull momentum.  

The market makers will likely spring into action if bitcoin jumps to all-time highs above $42,000 ahead of Friday, as most open interest is concentrated in higher strike price calls. “A massive chunk of open interest is in deeper OTM call strikes above $44,000,” Chepal said.

Data provided by analytics platform Genesis Volatility shows the largest concentration of open interest is in the $52,000 call. 

“In an attempt to protect against an out-of-the-money result, options traders may likely resort to delta hedging strategies,” Sui Chung, CEO of CF Benchmarks, told CoinDesk. 

Delta hedging, or delta-neutral, comprises multiple positions (long and shorts, call/puts) aimed at reducing, hedging the directional risk associated with price movements in the underlying asset. 

For instance, the delta of the $40,000 call expiring on Jan. 29 is currently 0.10. That means the option’s price will change by $0.10 for every $1 change in bitcoin’s price. 

See also: Bitcoin Bounces as Options Market Sees 20% Chance of $50K at Month’s End

Another way to look at it is that investors currently holding a long call position with a strike at $40,000 have a BTC 0.10 delta exposure. To hedge against the exposure, traders can short sell BTC 0.10 in the spot or futures market or else buy a put option with a 0.10 delta. 

Option traders generally hedge delta with options. However, in particularly fraught times they could also resort to hedging with the underlying asset itself, leading to heightened price volatility, according to Chung. 

“This can create a vicious cycle, with increased volatility leading to even more derivatives traders rushing to the same hedging strategies, which ends up having the same effect as pouring oil on an open fire,” Chung said. 

Bitcoin is currently trading near $34,100, having put in lows below $29,000 last week, according to CoinDesk 20 data. As long as these options remain open in the market, the next couple of days could be interesting – and perhaps volatile – for bitcoin.