Bitcoin Corrects on Fed Rate Hike, But Bulls Are Prepared for Friday’s Expiration of $1.2B Options

Bitcoin’s (BTC) rally of 17.5% between March 16 and 22 surprised options traders betting on price levels below $26,000. The move was a result of investors seeking protection against persistent inflation and the ongoing banking crisis.

Bitcoin bulls have been closely watching the negative effects of near-zero interest rates between April 2020 and April 2022, and some have used the information to profit from $1.2 billion in BTC options set to expire on March 24 .

Resilient inflation and better housing markets

According to the official Consumer Price Index (CPI) released on March 22, inflation in England unexpectedly rose to 10.4% in February due to higher food prices. This outcome is likely to prompt the Bank of England to raise interest rates on March 23, increasing the likelihood of a recession. A higher cost of capital is harmful to businesses and families, but it is the only way to stem the rise in consumer prices.

Meanwhile, US existing home sales rose 14.5% in February, following the first annual decline in prices in over a decade. The figures published on 21 March reflect the fall in mortgage interest rates as a result of increased demand for government bonds. In addition, the increase in sales indicates that the housing market has reached a price floor.

Investors frantically sought protection against monetary degradation as governments were forced to inject capital to prevent contagion in the banking sector. For example, the yield on five-year US Treasuries fell from 4.34% on March 8 to 3.6% on March 22, indicating increased demand for fixed-income instruments.

Is the new world one in which the prices of all assets rise?

Consumer prices continue to rise even as the S&P 500 reclaimed the 4,000 mark. Housing demand is increasing, and gold is up 7.8% in 2023. Every asset with a chance to profit from inflation is rising, a typical sign of fiat currency deterioration.

The move is not compatible with the macroeconomic scenario where banks required bailouts and large companies were forced to lay off thousands of employees due to declining sales prospects. Therefore, part of Bitcoin’s recent gains towards $28,000 is due to the weakening US dollar.

If fears of a recession continue to weigh on risk markets, Bitcoin may struggle to maintain the price levels necessary for bulls to earn $380 million or more by March 24 when weekly options expire.

Data also shows that bears were surprised when Bitcoin passed $26,000

The expiration of the weekly BTC options has $1.2 billion in open interest, but the actual number will be lower because bears have concentrated their bets on Bitcoin trading below $26,000.

The call-to-put ratio of 1.17 reflects the difference in open interest between $675 million calls and $575 million puts. Bears were caught off guard on March 17 when Bitcoin’s price rose above $26,000, so the likely result will be much lower than expected.

For example, if Bitcoin’s price remains near $27,700 on March 24 at 8:00 UTC, there will only be $21 million in put options. This difference arises due to the fact that the right to sell Bitcoin at $26,000 or $27,000 is null if BTC trades above this price on the expiration date.

Related: Bitcoin price whipsaws as Fed says rate hikes may not be ‘appropriate’

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 24 for call (call) and put (sell) instruments varies depending on the expiration price. The imbalance favoring each side constitutes the theoretical profit:

• Between $25,000 and $26,000: 7,400 calls vs. 5,500 putts. The net result favors the call (buy) instruments by $50 million.
• Between $26,000 and $27,000: 9,100 calls vs. 3,700 putts. The net result favors the call instruments by $140 million.
• Between $27,000 and $28,000: 12,700 calls vs. 800 putts. The Bulls increase their advantage to $330 million.
• Between $28,000 and $29,000: 14,300 calls vs. 20 putts. The Bulls’ advantage increases to $405 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 put option, effectively gaining positive exposure to Bitcoin above a certain price, but this effect is difficult to estimate.

Bears can only cut their losses, so they will likely throw in the towel and concentrate on the $3.8 billion monthly expiration on March 31. However, based on the weekly options data, bulls are in a good position to make at least $330 million.