The 16% rally between February 13 and February 16 has practically extinguished expectations of a decline in price to expire the monthly option below $21,500. As a result of the sudden rally, this bearish bet is unlikely to pay off, especially since the expiration takes place on February 24. However, the bullish price does not take into account the strong price rejection at $25,200 on February 21 and this reduces the possibility of locking in a profit of $480 million in BTC option expiration for this month.
Bitcoin investors’ main concern is tighter monetary policy as the US Federal Reserve (FED) raises interest rates and cuts its $8 trillion balance sheet. The 22 minutes of the latest FOMC meeting showed that members agreed on the latest 25 basis point hike and that the Fed is prepared to keep raising interest rates as long as necessary.
President of the Federal Reserve Bank of St. Louis James Bullard told CNBC on February 22 that steeper rate hikes would give them a better chance of reining in inflation. Pollard said,
“Let’s be sharp now, let’s control inflation in 2023.”
If confirmed, the rate of interest rate hikes will be negative for risky assets, including Bitcoin, as it attracts more profits for fixed income investments.
Even if the news flow remains negative, bullish prices could still make gains of up to $480 million at the expiration of monthly options on Friday. However, a bearish price could still increase their position significantly by pushing the price of BTC below $23,000.
Bears don’t expect bitcoin to hold $22,000
Open interest for the February 24th monthly options expiration is $1.91 billion, but the actual amount will be lower as the bears expect prices to fall below $23,000. However, these traders were surprised by the 13.5% jump in Bitcoin between February 15th and February 16th.
Bitcoin options gather open interest for February 24 Source: CoinGlass
The call-to-call ratio of 1.55 reflects an imbalance between call open interest (buy) of $1.16 billion and put interest of $750 million. If the Bitcoin price stays close to $24,000 at 8:00 AM UTC on February 24, only $125 million of puts will be available. This difference occurs because the right to sell Bitcoin at $22,000 or $23,000 is worthless if BTC trades above that level at expiration.
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The Bulls are targeting $23,000 for a $155 million profit
Here are the four most likely scenarios based on current price action. The number of option contracts available on February 17 for bull and put instruments varies, depending on the expiration price. An imbalance in favor of each party constitutes a theoretical profit:
Between $22,500 and $23,000: 12,500 calls for 10,700 points. The net score favors Buy Instruments (Taurus) by $40 million.
Between $23,000 and $24,000: 16,200 calls for 7,600 points. The net score favors Buy Instruments (Taurus) by $200 million.
Between $24,000 and $24,500: 21,100 calls for 5,200 points. The bulls increased their lead to $385 million.
Between $24,500 and $25,000: 23,200 calls for 3,600 points. The Bulls dominated by winning $480 million.
This rough estimate takes into account call options used in bullish bets and puts options exclusively in neutral to bearish trades. However, this oversimplification ignores more complex investment strategies.
For example, a trader can sell a call option, effectively gaining inverse exposure to bitcoin above a certain price, but unfortunately there is no easy way to estimate this effect.
Related: A US lawmaker introduces a bill that aims to limit the Fed’s power over the digital dollar
The Fed’s tightening policy is the bears’ best shot
Bitcoin’s rally must push the price above $24,500 on February 24 to secure a potential profit of $480 million. Instead, the best-case scenario would require the bears to dump the price 3.5% below $23,000 to cut their losses.
Given the negative pressure from the Fed’s desire to weaken the economy and rein in inflation, the decline has a good chance of correcting and clearing the $40 million loss on February 24. This move may not be effective, but it is the only way out for the price to drop. from losing millions of dollars in monthly BTC option expirations.
Looking at the broader time frame, investors still