Here’s why holding $20.8K will be critical in this week’s $1B Bitcoin options expiry

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Bit­coin (BTC) expe­ri­enced a 16.5% cor­rec­tion between Aug. 15 and Aug. 19 as it test­ed the $20,800 sup­port. While the drop is star­tling, in real­i­ty a $4,050 price dif­fer­ence is rel­a­tive­ly insignif­i­cant, espe­cial­ly when one accounts for Bit­coin’s 72% annu­al­ized volatility.

Cur­rent­ly, the S&P 500’s volatil­i­ty stands at 31%, which is sig­nif­i­cant­ly low­er, yet the index trad­ed down 9.1% between June 8 and June 13. So, com­par­a­tive­ly speak­ing, the index of major U.S. list­ed com­pa­nies faced a more abrupt move­ment adjust­ed for the his­tor­i­cal risk metric.

At the start of this week, cryp­to investors’ sen­ti­ment wors­ened after weak­er con­di­tions in Chi­nese real estate mar­kets forced the cen­tral bank to reduce its five-year loan prime rate on Aug. 21. More­over, a Gold­man Sachs invest­ment bank strate­gist stat­ed that infla­tion­ary pres­sure would force the U.S. Fed­er­al Reserve to fur­ther tight­en the econ­o­my, which neg­a­tive­ly impacts the S&P 500.

Regard­less of the cor­re­la­tion between stocks and Bit­coin, which is cur­rent­ly run­ning at 80/100, investors tend to seek shel­ter in the U.S. dol­lar and infla­tion-pro­tect­ed bonds when they fear a cri­sis or mar­ket crash. This move­ment is known as a “flight to qual­i­ty” and tends to add sell­ing pres­sure on all risk mar­kets, includ­ing cryptocurrencies.

Despite the bears’ best efforts, Bit­coin has not been able to break below the $20,800 sup­port. This move­ment explains why the $1 bil­lion Bit­coin month­ly options expiry on Aug. 26 could ben­e­fit bulls despite the recent 16.5% loss in 5 days.

Most bullish bets are above $22,000

Bit­coin’s steep cor­rec­tion after fail­ing to break the $25,000 resis­tance on Aug. 15 sur­prised bulls because only 12% of the call (buy) options for the month­ly expiry have been placed above $22,000. Thus, Bit­coin bears are bet­ter posi­tioned even though they placed few­er bets.

Bit­coin options aggre­gate open inter­est for Aug. 26. Source: CoinGlass

A broad­er view using the 1.25 call-to-put ratio shows more bull­ish bets because the call (buy) open inter­est stands at $560 mil­lion against the $450 mil­lion put (sell) options. Nev­er­the­less, as Bit­coin cur­rent­ly stands below $22,000, most bull­ish bets will like­ly become worthless.

For instance, if Bit­coin’s price remains below $22,000 at 8:00 am UTC on Aug. 26, only $34 mil­lion worth of these put (sell) options will be avail­able. This dif­fer­ence hap­pens because there is no use in the right to sell Bit­coin below $22,000 if it trades above that lev­el on expiry.

Bulls could secure a $160 million profit

Below are the four most like­ly sce­nar­ios based on the cur­rent price action. The num­ber of options con­tracts avail­able on Aug. 26 for call (bull) and put (bear) instru­ments varies, depend­ing on the expiry price. The imbal­ance favor­ing each side con­sti­tutes the the­o­ret­i­cal profit:

  • Between $20,000 and $21,000: 1,100 calls vs. 8,200 puts. The net result favors bears by $140 million.
  • Between $21,000 and $22,000: 1,600 calls vs. 6,350 puts. The net result favors bears by $100 million.
  • Between $22,000 and $24,000: 5,000 calls vs. 4,700 puts. The net result is bal­anced between bulls and bears.
  • Between $24,000 and $25,000: 7,700 calls vs. 1,000 puts. The net result favors bulls by $160 million.

This crude esti­mate con­sid­ers the call options used in bull­ish bets and the put options exclu­sive­ly in neu­tral-to-bear­ish trades. Even so, this over­sim­pli­fi­ca­tion dis­re­gards more com­plex invest­ment strategies.

Holding $20,800 is critical, especially after bulls were liquidated in futures market

Bit­coin bulls need to push the price above $22,000 on Aug. 26 to bal­ance the scales and avoid a poten­tial $140 mil­lion loss. How­ev­er, Bit­coin bulls had $210 mil­lion worth of lever­age long futures posi­tions liq­ui­dat­ed on Aug. 18, so they are less inclined to push the price high­er in the short term.

With that said, the most prob­a­ble sce­nario for Aug. 26 is the $22,000 to $24,000 range pro­vid­ing a bal­anced out­come between bulls and bears. 

If bears show some strength and BTC los­es the crit­i­cal $20,800 sup­port, the $140 mil­lion loss in the month­ly expiry will be the least of their prob­lems. In addi­tion, the move would inval­i­date the pre­vi­ous $20,800 low on July 26, effec­tive­ly break­ing a 7‑week-long ascend­ing trend.

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.

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