Bitcoins (BTC) 16% price gain between February 13th and 16th virtually extinguished bearish expectations for monthly options expiration below $21,500. As a result of the sudden rally, these bearish bets are unlikely to pay off, especially since the expiration is on February 24th. However, the bulls did not count on a strong rejection of the price to $25,200 on February 21, which reduces their chances of securing a profit of $480 million in this month’s expiration of BTC options.
The primary concern of Bitcoin investors is tighter monetary policy as the US Federal Reserve raises interest rates and shrinks its $8 trillion balance sheet. On February 22, the last meeting of the Federal Open Market Committee (FOMC) showed that members agree on the latest rate hike of 25 basis points and that the Fed is willing to continue raising rates as long as it deems necessary.
The President of the FED in St. Louis James Bullard told CNBC on February 22 that more aggressive interest rate hikes would give them a better chance of curbing inflation. Bullard said,
“Let’s be sharp now, let’s get inflation under control by 2023.”
If confirmed, the pace of increased interest rates would be negative for risk assets, including Bitcoin, as it brings greater profitability to fixed income investments.
Even if newsflow remains negative, bulls can make up to $480 million in Friday’s monthly option expiration. However, the bears can still significantly improve their situation by pushing the price of BTC below $23,000.
Bears didn’t expect Bitcoin to hold $22,000
Open interest for the February 24 monthly option expiration is $1.91 billion, but the actual number will be lower as it carries expected prices below $23,000. Still, these traders were surprised as Bitcoin gained 13.5% between February 15 and 16.
The call-to-put ratio of 1.55 reflects an imbalance between $1.16 billion in call (buy) open interest and $750 million in put (sell) options. If the price of Bitcoin remains near $24,000 at 8:00 UTC on February 24th, only these $125 million worth of put options will be available. This difference occurs because the right to sell Bitcoin at $22,000 or $23,000 is useless if BTC is trading above that level after expiration.
The Bulls are targeting $23,000 to secure a $155 million cap hit
Below are the four most likely scenarios based on current price action. The number of option contracts available on February 17 for call (bullish) and put (bearish) instruments varies depending on the expiration price. An imbalance in favor of each side constitutes a theoretical profit:
- Between $22,500 and $23,000: 12,500 calls vs. 10,700 insertions. The net result favors call (bull) instruments by $40 million.
- Between $23,000 and $24,000: 16,200 calls vs. 7,600 insertions. The net result favors call (bull) instruments by $200 million.
- Between $24,000 and $24,500: 21,100 calls vs. 5,200 insertions. The Bulls increase their advantage to $385 million.
- Between $24,500 and $25,000: 23,200 calls vs. 3,600 insertions. Bulls dominate with $480 million.
This rough estimate takes into account call options used in bullish bets and put options exclusively in neutral to bearish trades. Even so, this simplification does not take into account more complex investment strategies.
For example, a trader could sell a call option, effectively gaining inverse exposure to Bitcoin above a specific price, but unfortunately there is no easy way to estimate this effect.
Related: A US lawmaker is introducing a bill that aims to limit the Fed’s authority over the digital dollar
A tightening of Fed policy is best for the bears
Bitcoin bulls need to push the price above $24,500 on February 24 to secure a potential profit of $480 million. On the other hand, the bears’ best-case scenario requires a 3.5% price drop below $23,000 to minimize their losses.
Given the negative pressure of the Fed’s desire to weaken the economy and curb inflation, the bears have a good chance of improving their situation and coming to terms with the loss of $40 million on February 24. This move may not be successful, but it is the bears’ only way out of multimillion-dollar losses at the expiration of BTC monthly options.
Looking at the broader time frame, investors still believe the Fed is destined to reverse current monetary policy in the second half of 2023 – which could pave the way for a sustained rally ahead of the April 2024 bitcoin reward halving.
The views, thoughts and opinions expressed herein are solely those of the authors and do not necessarily reflect or represent the views and opinions of Cointelegraph.
This article does not contain investment advice or recommendations. Every investment and trading step involves risk and readers should do their own research when making decisions.
