How the $27B+ BTC & ETH Options Expiry Unfolded: Gamma, Pin Risk, and Hedging Playbooks
Summary
Executive framing: why the $27B+ expiry mattered
At year end the crypto derivatives market hit a milestone: more than $27 billion notional in combined Bitcoin and Ethereum options were set to expire on a single date, concentrated on the Deribit platform and clustered at a narrow band of strikes. Coverage at the time documented the scale and concentration of those expiries — see independent reports that broke down the $27B number and market expectations (Cryptopolitan, Coinpedia, BeInCrypto).
That concentration matters because options are not just bets on future price; they create flow — delta and gamma — that dealers must hedge. When open interest clusters at a few strikes, hedging becomes lopsided and can induce outsized spot moves, short‑term gamma squeezes, and classic pin risk as expiry approaches.
For intermediate and advanced traders or derivatives desks, the practical questions are: how did these mechanics unfold, what price paths were plausible, and what hedging or trade structures should one use to protect P&L or extract opportunity from the chaos? This article answers those questions and gives an actionable checklist you can use next time a big expiry looms.
Anatomy of the expiry: notional, concentration, and market footprint
Two simple facts made this expiry special:
- The headline >$27B notional (BTC + ETH) all expiring within the same roll window created a large, time‑compressed event. Multiple outlets corroborated the size and the platform concentration of this flow on Deribit. See the original market writeups for the breakdown and context (Cryptopolitan, Coinpedia).
- Open interest was heavily concentrated at a handful of strikes (for both BTC and ETH), which increases the chance of pinning — price gravitating to those strikes as hedging flows crystallize.
Why notional alone is misleading: notional measures gross exposure but doesn’t by itself give gamma or vega footprint. What's relevant for spot moves is the distribution of open interest across strikes and maturities and the dealers' net vega/gamma. When a large block is short gamma at or near the money, dealers will buy/sell spot dynamically to remain hedged, which amplifies volatility.
Expiry mechanics — gamma, pinning, and dealer hedging explained
Gamma and dealer behavior
Options sellers (dealers) are typically short gamma: when spot moves, the delta of their short positions changes and they must trade the underlying to stay hedged. If dealers are short gamma into expiry, their hedging is procyclical — they sell into weakness and buy into strength, amplifying moves. If dealers are long gamma, the opposite is true and they dampen moves.
The gamma exposure (often measured as GEX or net gamma exposure) is highest for near‑term options and peaks right before expiry. Large concentrated expiries therefore compress a lot of gamma risk into a short window, forcing intense hedging flows as the market oscillates.
Pinning and pin risk
Pinning occurs when the underlying gravitates toward a strike with significant options open interest at expiry. Two forces create pinning:
- Dealers hedge their short‑option delta at and around the strike, creating a local equilibrium.
- Market participants who are long or short the option exercise or do not exercise in ways that push spot toward the strike.
Pin risk is a practical headache: a FX or futures hedge that looked fine intraday can blow up if the spot pins to an inconvenient strike and the order book thins.
How expiries translate into real flows
The usual sequence in a concentrated expiry:
- As expiry approaches, implied volatility often compresses, increasing the gamma per option for the remaining positions (gamma is nonlinear).
- Dealers with short gamma start to hedge more frequently and with larger notional as theta decays and the curvature rises.
- If spot approaches a high open interest strike, hedges crowd the same price levels, and liquidity can dry up — that’s the genesis of a gamma squeeze.
- At expiry, settlement mechanics (cash vs physical, settlement windows) and settlement references can create last‑minute spikes.
Deribit expiries are cash-settled and the exchange-specific settlement index and timestamp become focal points for flows. With concentrated Deribit open interest, the settlement reference and timing were important real‑time variables for the desks hedging those positions.
Historical precedents and likely price paths
Large concentrated expiries have precedents in crypto and traditional markets. Historical patterns suggest several plausible short‑term price paths once a big expiry is approaching:
- Pinning to heavy strikes: the market grinds into a level and oscillates tightly as dealers rebalance — common when delta flows are symmetric.
- Enhanced volatility and spikes: when hedges are one‑sided or market liquidity is thin, sudden spikes or drops occur as dealers scramble to rebalance (classic gamma squeeze behavior).
- Mean reversion post‑expiry: once options settle and dealers unwind hedges, realized volatility often collapses and price drifts back toward prior trends.
Which path dominates depends on the pre‑expiry skew and whether the bulk of the open interest is net puts or calls. If a large put wall exists below spot and dealers are short puts, a sharp selloff is possible as dealers buy puts and sell spot to hedge. Conversely, heavy call concentration above spot creates upside gamma risk.
Practical hedging and trade ideas (before, during, after expiry)
Below are concrete strategies — each with the rationale, how to size it, and what to watch in live markets. These are not blanket recommendations; size relative to portfolio and liquidity profile.
1) Use futures to absorb dealer flows (tactical hedge)
- Rationale: Dealers’ delta hedges create directional pressure. Entering a futures position opposite to expected dealer activity can reduce short‑term drift into expiry.
- How: If you expect dealers to be short gamma and sell into weakness, buy scaled futures (or inverse perpetual length) to provide liquidity. Size conservatively — 1–5% of the notional in options exposure you expect dealers to hedge.
- Watch: Funding rates (for perps), basis between spot and futures, and order‑book depth around strike levels.
2) Gamma scalping / dynamic delta‑hedging (for desks)
- Rationale: If you can trade continuously and have low transaction costs, buy near‑term vega or gamma (long ATM options) and delta‑hedge dynamically to capture time decay and realized vol differences.
- How: Buy short‑dated straddles/strangles around expected volatility peaks then maintain a delta‑neutral book by trading spot/futures frequently. Profit comes if realized vol > implied vol paid.
- Watch: Transaction costs, slippage, and the frequency of hedging — a mispriced gamma hedge into a gap move can be painful.
3) Calendar spreads and implied-volatility term trades
- Rationale: Sell the near‑dated volatility that will compress at expiry while buying longer‑dated vol to preserve optionality.
- How: Sell short‑dated ATM options expiring into the big event and buy a further dated ATM option (or a ratio) to net long term vega but short near term. This captures theta while protecting against a large jump.
- Watch: Volatility term structure and roll risk; if near‑dated vol stays elevated, the carry can be negative.
4) Vega scalps and dispersion plays
- Rationale: If implied skew diverges between BTC and ETH, or between strikes within an asset, you can take relative vega positions.
- How: Long vega on the cheaper instrument while shorting vega on the rich instrument (e.g., long ETH near‑term straddle, short BTC near‑term straddle) sized to neutralize directional exposure.
- Watch: Correlation breakdowns and basis movements between BTC and ETH; cross‑asset contagion can blow up relative trades.
5) Collars and protective puts (capital preservation)
- Rationale: If you are long spot (BTC/ETH) and fear an expiry‑induced drawdown but don’t want to sell spot, use collars.
- How: Buy a protective put slightly out‑of‑the‑money and finance it by selling a higher strike call or using a diagonal to reduce cost. Choose strike widths based on acceptable drawdown (e.g., 10–20%).
- Watch: If the call you sold is concentrated at an expiry strike, be mindful of assignment or cash settlement dynamics.
6) Avoid binary risk near settlement times
- Rationale: Volatility and execution risk spike close to the settlement window. Orders can be picked off.
- How: Reduce position size, widen limits, or close one‑sided exposure ahead of final settlement if your desk cannot reliably manage last‑minute gamma.
- Watch: Exchange settlement timestamp and index composition — these define the precise moment of maximum risk.
Position sizing, slippage, and practical execution rules
- Scale into positions: don’t deploy full notional at once into a directional hedge. Use VWAP/TWAP if providing liquidity with futures.
- Anticipate slippage: assume higher realized slippage within ±30 minutes of expiry in thin markets; model worst‑case PnL on that basis.
- Use layered orders: if hedging a large delta, stagger fills across the book to avoid jumping liquidity and exacerbating your own impact.
- Monitor funding and basis: perpetual swap funding can make futures hedges expensive if funding spikes during the squeeze.
Risk management checklist for portfolio managers
Use this checklist to prepare a book for large expiries. Keep it accessible and rehearse it with your desk.
- Inventory: Know the exposure distribution by strike and tenor for BTC and ETH in your book and counterparties.
- Scenario P&L: Run 3 scenarios (pin, spike, collapse) with realistic slippage and funding assumptions.
- Hedging ladder: Predefine tiers for hedges (e.g., at 25%, 50%, 75% of expected move) and execution methods (limit vs market).
- Liquidity budget: Determine the maximum market orders you’re willing to trade into expiry without blowing out the price.
- Collateral & margin: Pre‑fund margin buffers and check funding rate risk on perps — a squeeze can spike margins rapidly.
- Communication: Ensure traders, risk, and settlement teams are aligned on expected settlement times and indices.
- Post‑expiry unwind plan: Have rules for when and how to unwind hedges after expiry to avoid being the liquidity vacuum.
Live indicators to monitor during a large expiry
- Gamma exposure (GEX) heatmaps and net open interest by strike.
- IV term structure and ATM implied volatility snapshots (near‑dated vs 2+ week options).
- Order book depth and bid‑ask spreads around key strikes.
- Funding rate and perp basis between spot and futures.
- Exchange settlement index and scheduled publication time.
After the dust settles: what typically happens
Once options have settled, dealers unwind hedges and realized volatility usually falls from expiry peaks. That unwind can create a v-shaped realized vol profile: spike into expiry, drop sharply after. Traders who survive the expiry with balanced hedges can re‑enter directional trades at tighter vol levels.
However, structural changes can persist — if expiry resulted in a trend change (e.g., a blow‑off top or long liquidation cascade), the post‑expiry regime may have a different volatility baseline. Use the settlement outcome as an information release and reassess your implied vs realized vol expectations.
Example playbook: 48 hours before to 48 hours after expiry
- T‑48 to T‑24h: Assess open interest concentration and net gamma. Begin reducing one‑sided exposures; consider small futures hedges opposite expected dealer flow.
- T‑24 to T‑2h: Tighten risk limits, avoid placing large limit orders near heavy strikes, execute layered hedges if necessary, and size any vega plays small.
- T‑2h to T+1h: Move critical hedges to fully executable instruments (futures, swaps) and avoid gambling on tight ATM options execution. If gamma scalping, expect high friction.
- T+1h to T+48h: Monitor unwind and be ready to take advantage of post‑expiry vol compression. Roll or close calendar spreads and reassess directional biases.
Final takeaways for traders and desks
Large, concentrated options expiries compress a lot of convexity into a short time and can produce outsized short‑term volatility through dealer delta‑hedging and pinning. Preparing for an expiry requires both macro awareness (where open interest sits) and tactical discipline (execution, sizing, and hedging instruments). The >$27B BTC/ETH expiry was a textbook case where concentrated notional combined with market structure to create transient but severe flow dynamics; future expiries will look similar when conditions align.
Advanced desks should incorporate these lessons into their playbooks, and even spot‑centric allocators should use collars or futures overlays to survive the noise. For context on the market coverage and mechanics of that specific event, consult the contemporaneous reporting that tracked the scale on Deribit (Coinpedia, BeInCrypto, Cryptopolitan).
For many cross‑desk discussions, Bitcoin remains the liquidity bellwether while Ethereum often sets the tone for DeFi‑related skew — both assets were central to this expiry and remain core to derivatives risk planning in crypto. Bitlet.app users and derivatives desks should incorporate these hedging patterns into trade ops and risk frameworks.
