The bitcoin options market is bracing for heightened volatility as over 20% of open interest on Deribit is set to expire in-the-money (ITM), several analysts said to The Block on Wednesday. As we approach Friday’s large quarterly expiry, potentially influenced by ‘quadruple witching’ and related volatility in U.S. markets, over 20% of Deribit open interest is set to expire in-the-money, equating to over $2.7 billion, total notional size of Friday's options expiry is over $10 billion. A quadruple witching occurs four times a year, around the end of each quarter, when contracts for index futures, index options, options, and futures all expire simultaneously. This event often leads to increased volatility and trading volume. Because a significant portion of this open interest is usually in-the-money, this suggests there is potential for large-scale trading activity as these contracts approach expiration.

The simultaneous expiration of stock-index futures, options on stock-index futures, single-stock options, and index options can generate significant volatility and volume. For example, the December 15, 2023, quad witching day saw the most volume in the S&P 500 in the second half of last year. The other quad witching days also had above-average activity. The folkloric name “witching” comes from the idea of certain times when dark, supernatural forces are active. It can metaphorically apply in markets if traders are forced to unwind large derivative positions. Such events could sometimes cause unexpected moves, although newer rules have reduced much of the previous havoc. For the most part, it now causes heavy volume.

Futures traders can take long and short positions around the clock from Sunday evening through Friday afternoon. If they want to keep a position through quarterly expiration, they must sell the expiring contract and buy into the newer contract. This so-called “rolling” is a big reason for the heavy volume on quad witching days. Stock options expire the third Friday of every month, so they’re always active on quadruple-witching days. It’s worth noting that thousands of companies have stock options — unlike the handful of index futures.

Stocks have been on a wild ride this week, and conditions could still get weirder as traders brace for “quadruple witching” on Friday, when a flurry of equity options and futures contracts expire. In particular, options contracts tied to $4 trillion in stocks, stock-index futures, and exchange-traded funds are set to expire, making Friday potentially the busiest day for options traders this year, according to data compiled by Rocky Fishman, the head of index volatility research at Goldman Sachs.

The term “quadruple witching” denotes days when a host of equity-linked options and futures contracts expire, as TradeStation explains. It only happens four times a year, once every quarter. Additionally, the largest slug of equity options expire in December, and this year is no exception, Fishman said, as the $4 trillion expiring on Friday is the largest options exposure heading into expiry since at least the start of the year.

Options tied to $2.4 trillion in S&P 500 index futures are expected to be the main event on Friday, according to Brent Kochuba, founder of options analytic service SpotGamma, as hundreds of thousands of contracts with strike prices concentrated around the 4,000 level are set to expire. Puts and calls on the large-cap index are “very concentrated at the 4,000 strike,” Kochuba said in comments emailed to MarketWatch, adding that recent turbulence in markets suggests traders may be underestimating how volatile markets might be heading into the end of the year.

Low levels of liquidity, typical during the latter half of December, could further exaggerate swings in stocks as options dealers scramble to adjust their positions accordingly, said Garrett DeSimone, head quant at OptionMetrics. “Large notional expirations can cause turbulence especially during periods of heightened volatility or constrained liquidity. When large amounts of gamma are shed through expiration, market makers have to undergo significant rebalancing to adjust their delta hedges. This can cause a short-term destabilization in markets, leading to higher volatility,” DeSimone said.