Bitcoin, altcoins and stocks rallied shortly after the Fed laid out its policy roadmap for 2022, but bears still have an advantage in this week $755 million options expiry.
Bitcoin’s (BTC) price has been in a down-trend since the $69,000 all-time high on Nov. 10, when the the Labor report showed inflation pushing above 6.2% in the United States. While this news could be beneficial for non-inflationary assets, the VanEck physical Bitcoin exchange-traded fund (ETF) denial by the U.S. Securities and Exchange Commission (SEC) on Nov. 12 threw some investors off-guard.
Bitcoin/USD price on Coinbase. Source: TradingView
While the ETF request denial was generally expected, the reasons given by the regulator may be worrisome for some investors. The U.S. SEC cited the inability to avoid market manipulation on the broader Bitcoin market due to unregulated exchanges and heavy trading volume based on Tether’s (USDT) stablecoin.
Analyzing the broader market structure is extremely relevant, especially considering that investors closely monitor meetings held by the U.S. Federal Reserve. Regardless of the magnitude of the upcoming tapering in the Fed’s bond and assets repurchase program, Bitcoin’s movements have been tracking the U.S. Treasury yields over the past 12 months.
Bitcoin/USD at FTX (orange, left) vs. U.S. 10-year Treasury Yields (blue, right). Source: TradingView
This tight correlation shows how decisive the Federal Reserve’s monetary policy has been with riskier assets, including Bitcoin. Moreover, the yield decline over the past three weeks from 1.64 to 1.43 partially explains the weakness seen in the crypto market.
Obviously, there are cother factors in play, for example, the market pullback on Nov. 26 was primarily based on concerns over the new COVID-19 variant. Regarding derivatives markets, a Bitcoin price below $48,000 gives bears complete control over Friday’s $755 million BTC options expiry.
Bitcoin options aggregate open interest for Dec. 17. Source: Coinglass.com
At first sight, the $470 million call (buy) options overshadow the $285 million put (sell) instruments, but the 1.64 call-to-put ratio is deceptive because the 14% price drop since Nov. 30 will likely wipe out most of the bullish bets.
If Bitcoin’s price remains below $49,000 at 8:00 am UTC on Dec. 17, only $28 million worth of those call (buy) options will be available at the expiry. In short, there is no value in the right to buy Bitcoin at $49,000 if it is trading below that price.
Bears are comfortable with Bitcoin below $57,000
Here are the three most likely scenarios for the $755 million Friday’s options expiry. The imbalance favoring each side represents the theoretical profit. In other words, depending on the expiry price, the quantity of call (buy) and put (sell) contracts becoming active varies:
Between $45,000 and $47,000: 110 calls vs. 2,400 puts. The net result is $105 million favoring the put (bear) options.
Between $47,000 and $48,000: 280 calls vs. 1,900 puts. The net result is $75 million favoring the put (bear) instruments.
Between $48,000 and $50,000: 1,190 calls vs. 1,130 puts. The net result is balanced between call and put options.
This crude estimate considers call options being used in bullish bets and put options exclusively in neutral-to-bearish trades. However, this oversimplification disregards more complex investment strategies.
For instance, a trader could have sold a put option, effectively gaining a positive exposure to Bitcoin (BTC) above a specific price. But, unfortunately, there’s no easy way to estimate this effect.
Bulls need $48,000 or higher to balance the scales
The only way for bulls to avoid a significant loss in the Dec. 17 expiry is by sustaining Bitcoin’s price above $48,000. However, if the current short-term negative sentiment prevails, bears could easily pressure the price down 4% from the current $48,500 and profit up to $105 million if Bitcoin price stays below $47,000.
Currently, options markets data slightly favor the put (sell) options, thus creating opportunities for additional negative pressure.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.