Here’s Why Holding $20.8K Will Be Crucial In This Week’s $1 Billion Bitcoin Options Expiry

Bitcoin (BTC) experienced a 16.5% correction between August 15 and August 19 when it tested the $20,800 support. While the drop is eye-catching, in reality a price difference of $4,050 is relatively insignificant, especially when you consider to Bitcoin’s 72% annual volatility.

Currently, the volatility of the S&P 500 is at 31%, which is significantly lower, but the index traded down 9.1% between June 8th and June 13th. Then, in comparison, the index of large US listed companies faced a more abrupt movement adjusted for the historical risk calculation.

Earlier this week, crypto investor sentiment soured after weaker conditions in Chinese real estate markets forced the central bank to cut its five-year prime lending rate on August 21. Moreover, a Goldman Sachs investment banking strategist stated that inflationary pressures will force the US Federal Reserve to further tighten the economy, negatively impacting the S&P 500.

Regardless of the correlation between stocks and Bitcoin, which currently runs at 80/100, investors tend to seek shelter in the US 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 to all risk markets, including cryptocurrencies.

Despite the bears’ best efforts, Bitcoin has failed to break below the $20,800 support. This move explains why the monthly options on $1B Bitcoin Expires August 26 could benefit bulls despite the recent loss of 16.5 % in 5 days.

Most bullish bets are above $22,000

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

A broader view using the 1.25 call-to-put ratio shows more bullish bets because call (buy) open interest stands at $560 million versus $450 million put (sell) options. Still, since Bitcoin is currently below $22,000, most bullish bets are likely to be worthless.

For example, if Bitcoin’s price remains below $22,000 at 8:00 UTC on August 26, only $34 million of these put options will be available. This difference occurs because there is no use for the right to sell Bitcoin below $22,000 if it trades above that level at expiration.

The Bulls can secure a profit of 160 million dollars

Below are the four most likely scenarios based on current price action. The number of option contracts available on 26 August for buy (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: 1100 calls against 8200 putts. The net result favors bears by $140 million.
• Between $21,000 and $22,000: 1600 calls against 6350 putts. The net result favors bears by $100 million.
• Between $22,000 and $24,000: 5000 calls vs. 4700 putts. The net result is balanced between bulls and bears.
• Between $24,000 and $25,000: 7,700 calls vs. 1,000 plasters. The net result favors bulls by $160 million.

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.

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

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

That being said, the most likely scenario for August 26 is the $22,000 to $24,000 range which provides a balanced outcome between bulls and bears.

If bears show some strength and BTC loses the critical support at $20,800, the loss of $140 million in the monthly expiration will be the least of their problems. Additionally, the move would invalidate the previous low of $20,800 on July 26, effectively breaking a seven-week uptrend.

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.