Bitcoin bears stand to profit from this week’s $710 million options expiry, which could be used to add additional sell pressure to the Bitcoin price.
On November 9, Bitcoin fell below $16,000, reaching its lowest level in two years. The two-day correction resulted in a 27% downtrend and the loss of $352 million in leveraged long (buy) futures contracts.
To date, the Bitcoin price is down 65% for 2022, but it’s important to compare its price action to that of the world’s largest technology companies. For example, Meta Platforms (META) is down 70% year to date, while Snap Inc. (SNAP) is down 80%. Furthermore, Cloudflare (NET) will be down 71% in 2022, followed by Roblox Corporation (RBLX), which will be down 70%.
Investors have shied away from riskier assets due to inflationary pressures and fears of a global recession. Because of this protective movement, the five-year yield on US Treasuries reached 4.33% earlier in November, the highest level in 15 years. Investors demand a higher premium to hold government debt, indicating skepticism about the Federal Reserve’s ability to control inflation.
The most pressing issues are FTX’s contagion risks and Alameda Research’s insolvency. The trading group was the second-largest trading exchange for Bitcoin derivatives and managed multiple cryptocurrency project funds.
Bulls were overly optimistic and will suffer the consequences
The open interest for the options expiry on November 11 is $710 million, but the actual figure will be lower because bulls were unprepared for prices below $19,000. After Bitcoin remained above $20,000 for nearly two weeks, these traders became overconfident.
The 0.83 call-to-put ratio reflects the disparity in open interest between the $320 million call (buy) options and the $390 million put (sell) options. Bitcoin is currently trading near $17,500, implying that most bullish bets will soon be worthless.
If the price of Bitcoin remains below $18,000 at 8:00 a.m. UTC on November 11, only $45 million of these call (buy) options will be available. This difference occurs because the right to purchase Bitcoin at $18,000 or $19,000 is rendered null and void if BTC trades below that level on expiry.
Bears aim for sub-$17k to secure a $200 million profit
Based on the current price action, the three most likely scenarios are as follows. The number of options contracts available for call (bull) and put (bear) instruments on November 11 varies according to the expiry price. The theoretical profit is the imbalance favoring each side:
1,300 calls vs. 12,900 puts between $16,000 and $18,000. Bears win with a profit of $200 million.
2,500 calls vs. 10,200 puts between $18,000 and $19,000. By $140 million, the net result favors put (bear) instruments.
3,600 calls vs. 5,900 puts between $19,000 and $20,000 The net result is that the put (bear) instruments are $40 million better off.
This rough estimate takes into account only call options in bullish bets and put options in neutral-to-bearish trades. Nonetheless, this oversimplification excludes more complex investment strategies.
A trader, for example, could have sold a call option, effectively gaining negative exposure to Bitcoin above a certain price, but there is no easy way to estimate this effect.
Bulls probably have less margin to support the price
Bitcoin bulls must push the price above $19,000 on November 11 to avoid a $140 million loss. To maximize their gains, the bears’ best-case scenario requires a slight push below $17,000.
Bitcoin bulls recently liquidated $352 million in leveraged long positions in two days, so they may have less margin required to support the price. To put it another way, bears have a head start on pinning BTC below $17,000 ahead of the weekly options expiry.