Investors were surprised by Bitcoin (BTC) price falling to $25,500 on May 12, and this shock extended to options traders. The strong correction was not restricted to cryptocurrencies and some large-cap stocks faced 25% or heavier weekly losses in the same period.
Growing economic uncertainty impacted S&P 500 index members like Illumina (ILMN), which declined by 27% over the past seven days and Caesars Entertainment (CZR) faced a 25% drop. Shopify (SHOP), one of the largest Canadian e-commerce companies also saw its stock plunge by 28%.
Traders are scratching their heads and asking whether it’s the U.S. Federal Reserve tightening to blame for the volatility. The monetary authority has been increasing the interest rates and has also reaffirmed their plans to sell bonds and debt-related instruments.
While this may be the case, traders should remember that the stock market rallied 113% between 2017 and 2021, as measured by the S&P 500 index. Keeping that in mind, the recent downturn is also a reflection of excessive valuations and overconfidence from investors.
Fortunately, not everything has been negative for Bitcoin. On May 10, Townsquare Media, a New York-based digital marketing and radio station company, disclosed a $5 million Bitcoin investment. Nubank, the largest digital bank in Brazil and Latin America, also announced that it would allocate roughly 1% of its net assets to Bitcoin.
Bulls were taken by surprise
Bitcoin’s drop to $25,500 on May 12 took bulls by surprise because less than 1% of the call (buy) option bets for May 13 have been placed below this price level.
Bulls might have been fooled by the recent attempt to overtake $40,000 on May 4, because their bets for May 12’s $610 million options are largely concentrated above $34,000.
A broader view using the 0.90 call-to-put ratio shows a slight advantage for the $320 million put (sell) options versus the $290 million call (buy) instruments. But now that Bitcoin is below $30,000, most of the bullish bets will become worthless.
If Bitcoin’s price remains below $30,000 at 8:00 am UTC on May 13, only $1 million worth of those call (buy) options will be available. This difference happens because there is no use in the right to buy Bitcoin at $30,000 if it trades below this level at expiry.
Bears are aiming for a $260 million profit
The three most likely scenarios based on the current price action are listed below. The number of options contracts available on May 13 for call (bull) and put (bear) instruments varies, depending on the expiry price. The imbalance favoring each side makes up the theoretical profit:
- Between $27,000 and $30,000: 0 calls vs. 9,350 puts. The net result favors the put (bear) instruments by $260 million.
- Between $30,000 and $32,000: 150 calls vs. 7,500 puts. The net result favors bears by $220 million.
- Between $32,000 and $33,000: 1,100 calls vs. 5,900 puts. The net result benefits put (bear) options by $150 million.
This crude estimate considers the put options used in bearish bets and the call options exclusively in neutral-to-bullish trades. Even so, this oversimplification disregards more complex investment strategies.
For instance, a trader could have sold a put option, effectively gaining positive exposure to Bitcoin above a specific price but unfortunately, there is not an easy way to estimate this effect.
Bears have incentives to suppress Bitcoin price
Bitcoin bears need to hold the price below $30,000 on May 13 to secure a $260 million profit. On the other hand, the bulls’ best case scenario requires a 10.7% gain from the current $28,900 to the $32,100 zone to limit their losses to $150 million.
Bitcoin bulls had $1.73 billion in leveraged long positions liquidated over the past three days, so they probably have fewer resources to push the price higher in the short term. With this said, bears have greater odds of suppressing BTC below $30,000 before the May 13 options expiry.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Gist Vile. Every investment and trading move involves risk. You should conduct your own research when making a decision.