Academy Industry Analysis Article

Futures Expiry: How It Affects Crypto Market Liquidity


You’re not alone noticing that at the end of the week, the crypto market usually becomes more volatile. Some reports suggest that this is because of “derivative expiry”, when most derivative contracts are expired or settled on Fridays. What does the expiry date of futures contracts have to do with market volatility?

The lifespan of a futures contract

Futures contracts have a limited lifespan that will influence the outcome of your trades and exit strategy, and this is known as the expiry date. An expiry date refers to the last day the contract is valid. On or before this day, traders need to decide what to do with their expiring position. Depending on the type of derivative, an expiry date can lead to different outcomes. For futures, traders can choose to close the position to realize profits or losses, or roll over the contract to a future date; but for options, contracts cannot be extended, traders need to either close the position or let it expire worthless.

Generally, derivative contracts are divided into several expiration dates throughout the year. For most exchanges on the market, expiry dates range from weekly, bi-weekly, monthly, to quarterly and bi-quarterly. For example, a trader holds a BTC contract until expiry, he can either buy or sell the contract to take delivery of the BTC before expiration, or roll over the contract to a future date, if the target price has not been reached yet. 

How expiry dates affect market liquidity

Liquidity is crucial in determining the success of a futures market. In a futures market, there must be enough traders (both buyers and sellers) to ensure a high turnover to permit the buying and selling of contracts. Large trading volumes can provide liquidity, so that traders can select the most appropriate contracts according to their delivery commitments. With more bids to buy and offers to sell in the market, it creates greater pricing efficiency for traders too.

As the contract expiry day approaches, you often notice higher trading volume and abnormal volatility, including a significant increase in trading volume on the previous day before the expiry day and immediate decrease after the expiry day. Why?

A potential explanation of the increased trading volume before the futures expiration day is because traders are rolling their futures contracts to a further date to keep their positions open, which is usually happened shortly before the initial expiry date.

Another reason is that short-term traders tend to exit before the contract expires, so that they can take the realized profits (or losses) off the price fluctuations, and at the same time avoid actually buying or selling the underlying asset. Therefore, most futures contracts are not held until expiration.

When volume surges in the run-ups to expiry days, the increase in volatility will be spilt over to the underlying asset and influence futures prices, especially when there are more speculators in the market. Say if speculators are optimistic about BTC price in the near future, the volume of buy contracts would increase in comparison with the sell contracts. This directly improve market liquidity over a short period of time, which also serves the hedgers’ long-term interests as prices continue to go up.

OKEx adjusts futures and options expiry periods

While futures and other derivatives increase volatility in the market, they are important vehicles to hedge or manage different kinds of risks, as well as enhancing the liquidity of the market.

In order to facilitate market liquidity and enhance trading opportunities, we are pleased to announce the addition of bi-quarterly contracts on OKEx Futures and Options markets! After implementing this update, users can better manage their positions and make profits amidst market volatility when the expiration date is approaching. 


Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involves significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.

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