Bitcoin Rises After Fed Rate Hike, But Bears Can Still Win Friday’s Expiration Of $1.76B Options

by · July 28, 2022

Bitcoin’s (BTC) price has been stuck in a descending channel since July 20, and it is currently heading towards the $20,000 support at the end of July. Adding to this bearish price action, BTC is down 50% year-to-date, while US-listed tech stocks, as measured by the Nasdaq-100 index, accumulated a 24% loss.

Bitcoin USD Price Index, 4 hours. Source: TradingView

As the US central bank tightens its economic policy by raising interest rates and tapering purchases of debt assets, risk assets have reacted negatively. Fed Chair Jerome Powell is set to wrap up a two-day meeting on July 27 and market analysts expect a nominal rate hike of 0.75%.

Tensions in Europe are escalating as Russian state-controlled gas company Gazprom plans to cut supplies to the Nord Stream 1 pipeline starting July 27. According to CNBC, the company is blaming a problem with turbine maintenance, but European officials think otherwise.

Helping tech stocks’ performance on July 27 was the US Senate’s approval of the “Chips and Science” bill, which provides $52 billion in debt- and tax-backed subsidies for US semiconductor manufacturing. An additional $24 billion in credits for the sector is estimated, with the aim of increasing research to compete with China.

For these reasons, traders have mixed feelings about the upcoming Fed announcement and the impact of a global crisis on cryptocurrency markets. As long as Bitcoin’s correlation to traditional markets remains high, especially technology stocks, investors will seek protection by moving away from risk-on asset classes such as cryptocurrencies.

Bulls pinned their hopes on $24,000 and higher

The open interest for monthly Bitcoin options expiration on July 29 is $1.76 billion, but the actual figure will be lower since bulls were surprised when BTC failed to break the $24,000 resistance on July 20.

Bitcoin options gather open interest for July 29. Source: CoinGlass

The call-to-put ratio of 1.18 reflects $950 million call (buy) open interest versus $810 million put (sell) options. Still, with Bitcoin standing below $23,000, most of the bullish bets are likely to be worthless.

For example, if Bitcoin’s price remains below $23,000 on July 29, bulls will only have $145 million worth of those call options. This difference occurs because there is no use of a right to buy Bitcoin at $23,000 if it trades below that level on July 29 at 08:00 UTC.

The Bears can secure a $360 million win on Friday

Below are the four most likely scenarios based on current price action. The number of option contracts available on July 29 for call (call) and put (sell) instruments varies, depending on the expiration price. The imbalance favoring each side constitutes the theoretical profit:

  • Between $19,000 and $20,000: 400 calls (purchase) vs. 19,300 putts (sell). The net result favors bears by $360 million.
  • Between $20,000 and $22,000: 3,900 calls (purchases) vs. 11,800 putts (sell). Bjørner has an advantage of 230 million dollars.
  • Between $22,000 and $24,000: 10,300 calls (purchases) vs. 8,600 putts (sell). The net result is balanced between bulls and bears.
  • Between $24,000 and $25,000: 14,400 calls (purchases) vs. 7,100 putts (sell). The Bulls have a $175 million advantage.

This rough estimate considers the call options used in bullish plays and the put options exclusively in neutral-to-bearish trades. Yet this oversimplification ignores more complex investment strategies.

For example, a trader could have sold a call option, effectively gaining negative exposure to Bitcoin above a certain price, but unfortunately there is no easy way to estimate this effect.

Bitcoin bears need to push the price below $20,000 on July 29 to secure a $360 million profit. On the other hand, bulls can avoid losses by pushing BTC above $22,000, balancing the valid bets from both sides. Bulls seem hell-bent on putting their losses behind them and starting August with a clean slate, but it could still go either way.

The views and opinions expressed herein are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trade involves risk. You should do your own research when making a decision.