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Bitcoin options data points to an interesting outcome after this week’s $1.9B expiry

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The upcoming $1.9 billion Bitcoin (BTC) monthly options expiry on Aug. 25 is key to defining whether the $26,000 support level will hold. One could pin the recent cryptocurrency market sell-off to the U.S. Securities Exchange Commission decision to delay the spot Bitcoin exchange-traded funds (ETF), but there’s also the macroeconomic perspective.

If the U.S. Federal Reserve’s efforts to curb inflation work, it’s probable that the trend of a stronger U.S. dollar will persist. This was evident as the Dollar Strength Index (DXY), a measure of the dollar against other currencies, reached its highest level in 76 days by August 22.

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To prevent a potential loss of $380 million due to the monthly BTC options expiry, Bitcoin bulls must ensure Bitcoin’s price trades above $27,000 by August 25.

Bitcoin bears will benefit from the threat of harsh regulation

Cryptocurrency bulls have encountered regulatory challenges lately. This is evident as the top two cryptocurrency exchanges, Binance and Coinbase, are currently entangled in lawsuits with the SEC. Additionally, the initial victory celebrated by Ripple against the SEC is now under appeal by the regulatory body.

Adding to these developments, Bitstamp exchange recently revealed its decision to halt staking services for U.S.-based clients. A pivotal concern within the ongoing U.S. regulatory landscape revolves around the classification of ETH as either a commodity or a security.

Furthermore, Binance exchange has communicated the suspension of its crypto debit card offerings across Latin America and the Middle East. This decision follows allegations of Binance also suspending Euro withdrawals and deposits through SEPA on August 20. The exchange clarified that there is no definite timeline for reinstating the service.

Data shows bulls were excessively optimistic on Bitcoin price

The open interest for the options expiry on August 25 stands at $1.9 billion. However, it’s projected that the final amount will be less due to certain traders foreseeing price levels reaching $29,000 or even higher. The unexpected 12% correction in Bitcoin’s price from August 14 to August 19 certainly took bullish investors off guard, as evident from the Deribit Bitcoin options interest chart.

Deribit Bitcoin options aggregate open interest for July 28. Source: Deribit

The 0.56 put-to-call ratio reflects the imbalance between the $1.2 billion in call (buy) open interest and the $685 million in put (sell) options. However, if Bitcoin’s price remains near $26,500 at 8:00 am UTC on Aug. 25, only $35 million worth of these call (buy) options will be available. This difference happens because the right to buy Bitcoin at $27,000 or $28,000 is useless if BTC trades below that level on expiry.

Bitcoin bears aim for sub-$26,000 to maximize their gains

Below are the four most likely scenarios based on the current price action. The number of options contracts available on Aug. 25 for call (buy) and put (sell) instruments varies depending on the expiry price. The imbalance favoring each side constitutes the theoretical profit.

This crude estimate disregards more complex investment strategies. For instance, a trader could have sold a call option, effectively gaining negative exposure to Bitcoin above a specific price. Unfortunately, there’s no easy way to estimate this effect.

  • Between $25,000 and $26,000: 100 calls vs. 15,100 puts. The net result favors the put instruments by $380 million.
  • Between $26,000 and $27,000: 1,400 calls vs. 11,000 puts. The net result favors the put instruments by $250 million.
  • Between $27,000 and $28,000: 4,000 calls vs. 8,400 puts. The net result favors the put instruments by $110 million.
  • Between $28,000 and $29,000: 6,000 calls vs. 5,300 puts. The net result is balanced between call and put options.

Take note that for the bulls to level the playing field before the monthly expiry, they must achieve a 6% price increase from $26,400. In contrast, the bears only require a modest 2% correction below $26,000 to secure a $380 million advantage on August 25.

Given Bitcoin’s repeated drops below the $26,000 support level from August 21 to August 23, it wouldn’t be surprising if this level was tested again before the options expiry. Furthermore, considering the current cryptocurrency regulatory landscape, there’s minimal incentive for Bitcoin bulls to reverse the prevailing bearish momentum after the $1.9 billion monthly options expiry.