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

$1.9 billion worth of monthly options on Bitcoin (BTC), which are set to expire on Aug. 25, are key to whether support at $26,000 holds. One might blame the SEC’s decision to delay a spot bitcoin exchange-traded fund (ETF) for the recent cryptocurrency market sell-off, but there are also macroeconomic factors.

If the Fed’s efforts to curb inflation pay off, the dollar’s strengthening trend is likely to continue. This was evident when the Dollar Strength Index (DXY), which measures the greenback against other currencies, was at its highest level in 76 days as of Aug. 22.

To prevent potential losses of $380 million from monthly BTC options expiration, Bitcoin bulls must ensure Bitcoin is trading above $27,000 by August 25.

Bitcoin Bears Set to Benefit from Threat of Tough Regulation

Cryptocurrency bulls have recently encountered regulatory challenges. This is evident because the two largest cryptocurrency exchanges, Binance and Coinbase, are currently embroiled in lawsuits with the SEC. Additionally, the initial victory against the SEC that Ripple celebrated is now being appealed by the regulator.

In addition to these developments, the Bitstamp exchange recently announced its decision to stop staking for U.S.-based clients. A key issue in the current US regulatory environment revolves around the classification of ETH as a commodity or security.

Additionally, the Binance exchange has announced the suspension of crypto debit card services in Latin America and the Middle East. This follows allegations that Binance also suspended euro withdrawals and deposits via SEPA on Aug. 20. The exchange clarified that there is currently no firm timetable for resuming the service.

Data Shows Bulls Are Too Optimistic About Bitcoin Price

Open interest in options expiring on Aug. 25 was $1.9 billion. However, the final amount is expected to be reduced as some traders expect the price level to reach $29,000 and beyond. As can be seen from the Deribit Bitcoin options rate chart, an unexpected 12% correction in the price of Bitcoin between August 14 and August 19 certainly caught bullish investors off guard.

The put-to-call ratio of 0.56 reflects an imbalance between $1.2 billion of call (buy) open interest and $685 million of put (sell) options. However, if the bitcoin price stays near $26,500 at 8:00 AM UTC on August 25, only $35 million of those call (buy) options will be worth. This discrepancy occurs because the right to buy Bitcoin for $27,000 or $28,000 is useless if BTC is trading below that level at expiration.

Bitcoin Bears Target Sub-$26,000 to Maximize Gains

Below are the four most likely scenarios based on current price action. The number of options contracts available for the August 25 call (buy) and put (sell) instruments varies based on the price at expiration. An imbalance that favors both parties constitutes a theoretical profit.

This rough estimate ignores more complex investment strategies. For example, a trader could sell a call option, effectively gaining negative exposure to Bitcoin above a certain price. Unfortunately, there is no easy way to estimate this effect.

• Between $25,000 and $26,000: 100 calls and 15,100 puts. The end result was $380 million in favor of the bearish instrument.
• Between $26,000 and $27,000: 1,400 calls and 11,000 puts. The end result was $250 million in favor of the bearish instrument.
• Between $27,000 and $28,000: 4,000 calls and 8,400 puts. The end result was $110 million in favor of the bearish instrument.
• Between $28,000 and $29,000: 6,000 calls and 5,300 puts. The end result is a balance between calls and puts.

Note that in order for the bulls to level the playing field by the monthly expiry, they would have to move the price up 6% from $26,400. In contrast, bears only need a small 2% correction below $26,000 to gain a $380 million advantage on Aug. 25.

Given that Bitcoin dropped below the $26,000 support multiple times from Aug. 21 to Aug. 23, it wouldn’t be surprising if the level was retested before the options expired. Moreover, given the current cryptocurrency regulatory environment, Bitcoin bulls have little incentive to reverse the current bearish momentum following the $1.9 billion monthly options expiration.