Bitcoin bears could face $440 million in losses at Friday’s options expiration

by · March 16, 2023

The rejection that followed Bitcoin’s (BTC) rally to $26,500 may appear to be a victory for bears, but $24,750 on March 14 was the highest daily close in nine months. Furthermore, Bitcoin has gained 26.5% since March 10, when the California Department of Financial Protection and Innovation shut down Silicon Valley Bank (SVB).

The recent price increase can be attributed to various factors, including the extraordinary $25 billion in financing from the Federal Reserve and the US Treasury on March 12, which reduced the banks’ systemic risk. Nevertheless, Bitcoin bulls are well positioned to make up to $440 million when weekly options expire on March 17.

How Silicon Valley Bank Sparked a Stablecoin Bank Run

Before SVB’s demise, SVB’s total assets exceeded $200 billion, placing it among the top 20 financial institutions in the United States. Nonetheless, the most direct impact on the cryptocurrency market was the $3.3 billion deposit from Circle’s USD Coin (USDC) stablecoin reserves. USDC net redemptions totaled $3 billion between March 13 and 15, when the stablecoin traded below parity.

Signature Bank (SI), which was shut down on March 12 by the New York Department of Financial Services, added to the negative pressure on crypto markets. Silvergate was more important to the crypto industry because it provided services to many crypto-related businesses, including Coinbase, Celsius, and Paxos.

This move could explain why the $1.2 billion weekly Bitcoin options expiring on March 18 will almost certainly favor bulls. However, a drop in commodity prices, especially for oil, could have an impact on cryptocurrencies.

Crude oil at the lowest price since December 2021

Oil prices fell 10% between March 9 and 15, hitting their lowest level in more than a year, amid concerns that a crisis of confidence in the banking sector could lead to a recession and reduce oil demand.

According to government data released on March 16, US crude inventories rose by 1.6 million barrels last week, adding to bearishness in the market. The increase was higher than the consensus forecast of a build-up of 1.2 million barrels.

If fears of contagion spread to other markets, Bitcoin may struggle to maintain the price levels required to earn $360 million or more when the options expire on March 17.

Bjørner placed several bets, but the vast majority will be worthless

Open interest for the March 17 options expiration is $1.2 billion, but the actual figure will be lower because bears have concentrated their bets on Bitcoin trading below $23,500.

Bitcoin Options Collect Open Interest for March 17th. Source: CoinGlass

The difference in open interest between $590 million call options and $640 million put options is reflected in the 0.93 call-to-put ratio. However, the expected result is likely to be much lower, as bears were caught off guard when Bitcoin’s price rose above $23,000 on March 13.

For example, if the price of Bitcoin remains near $24,500 at 08:00 UTC on March 17, there will only be $32 million of put options available. This difference occurs because the right to sell Bitcoin at $23,000 or $24,000 becomes void if BTC trades above this level at expiration.

Related: Blockchain Association seeks information from Fed, FDIC and OCC on ‘de-banking’ crypto firms

The most likely outcomes favor bulls by a large margin

Below are the four most likely scenarios based on current price action. The number of option contracts available on March 17 for call (buy) and put (sell) instruments varies depending on the expiration price. The imbalance favoring each side constitutes the theoretical profit:

  • Between $23,000 and $24,000: 9,900 calls vs. 5,800 putts. The net result favors the call (buy) instruments by $100 million.
  • Between $24,000 and $24,500: 11,400 calls vs. 3,700 putts. The net result favors the call instruments by $185 million.
  • Between $24,500 and $25,500: 15,100 calls vs. 700 putts. The Bulls increase their advantage to $360 million.
  • Between $25,500 and $26,000: 17,500 calls vs. 300 putts. The Bulls’ advantage increases to $440 million.

This rough estimate only considers call options in bullish plays and put options in neutral-to-bearish trades. Nevertheless, this simplification precludes more complex investment strategies.

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

To cut their losses significantly, Bitcoin bears need to push the price below $24,000 on March 17. However, bears have less margin to apply downside pressure given the liquidation of $240 million in leveraged short futures contracts between March 12-15.

The views, thoughts and opinions expressed herein are those of the authors alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.