The bearish’ forecast for a monthly options expiry below $21,500 was essentially extinguished by bitcoin’s 16% price increase between February 13 and February 16. These negative bets are unlikely to win due to the sudden surge, especially given that the expiry is on February 24. Bulls, on the other hand, did not anticipate the significant price rejection at $25,200 on February 21, which lessens their chances of making $480 million in profit from this month’s BTC options expiry.
As the U.S. Federal Reserve is raising interest rates and shrinking its $8 trillion balance sheet, investors in bitcoin are mostly worried about a tougher monetary policy. The most recent Federal Open Market Committee meeting minutes from February 22 revealed that all members agreed on the most recent 25 basis point rate rise and that the Fed is prepared to keep raising rates for as long as it is considered necessary.
On February 22, St. Louis Fed President James Bullard told CNBC that a more aggressive interest rate increase would improve their ability to control inflation. Bullard declared:
“Let’s be sharp now, let’s get inflation under control in 2023.”
If verified, the faster pace of rising interest rates would be detrimental to risk assets like Bitcoin since it would boost the profitability of fixed-income investments.
Bulls still have a chance to make up to $480 million at Friday’s monthly options expiry, even if the newsflow stays unfavorable. Yet, by driving the BTC price below $23,000, bears might still greatly enhance their position.
The monthly options expiration on February 24 has $1.91 billion in open interest, but the actual amount will be less because bears anticipate prices below $23,000. Yet, these traders were taken aback when Bitcoin rose 13.5% between February 15 and February 16.
The $1.16 billion call (buy) open interest and the $750 million put (sell) open interest are inequitable, as shown by the 1.55 call-to-put ratio. On February 24, at 8:00 am UTC, only $125 million worth of these put (sell) options will be available if Bitcoin’s price remains around $24,000. This discrepancy arises from the fact that if BTC moves above that price at expiration, the ability to sell Bitcoin for $22,000 or $23,000 is meaningless.
Based on the price movement right now, the four most likely outcomes are listed below. Depending on the expiry price, different call (bull) and put (bear) instruments have different numbers of options contracts available on February 17.
This rough estimate takes into account just putting options in neutral to bearish transactions and call options alone in bullish wagers. Yet, this simplicity ignores more sophisticated investing techniques.
However, there is no simple method to evaluate this effect. For instance, a trader may have sold a call option, essentially earning inverse exposure to Bitcoin above a certain price.
On February 24, bitcoin bulls must raise the price above $24,500 to lock in a possible $480 million profit. The bears’ best-case scenario, on the other hand, calls for a 3.5% price drop below $23,000 to reduce their losses.
Bears have a decent chance of improving their condition and settling with a $40 million loss on February 24 given the negative pressure from the Fed’s objective to undermine the economy and manage inflation. The bears’ only escape from millions of dollars in losses on the BTC monthly options expiry is through this movement, which may or may not be effective.
Looking at a longer time horizon, investors continue to expect that the Fed will change its monetary policy in the second half of 2023, perhaps opening the door for a long-lasting rise before the April 2024 halving of the Bitcoin block reward.