Looming macro issues and the expiration of $1 billion in ETH options this week threaten to keep Ethereum’s price below the $1,800 support level.
Ethereum (ETH) performance over the past three months has been less than satisfactory for holders, with a 50% correction since March 3.
One-day Ethereum/USD chart on Kraken. Source: Trade View
Investors sought refuge in US dollars due to stock volatility, and on May 13, the DXY index hit its highest level in 20 years. The DXY measures the US Dollar against a basket of major foreign currencies including the British Pound Sterling (GBP), the Euro (EUR) and the Japanese Yen (JPY).
In addition, the US 5-year Treasury yield hit its highest level since August 2018, trading at 3.10% on May 9, suggesting investors are demanding higher yields to offset inflation. In short, macro data reflects investors’ risk aversion and this partly explains Ethereum’s demise.
Adding to the panic among Ethereum traders on May 25 was a reorganization of the seven blockchains on Ethereum’s Beacon chain. The actual sequence of transactions was removed from the chain as the competing block received more support from network participants. Fortunately, this situation is not uncommon and could be due to a miner with large resources or an error.
According to Coinglass, the main victims of the 11% ether price correction were leveraged (long) traders who had liquidated a total of $160 million on derivatives exchanges.
The bulls bet at $2,100 and above.
The open interest for May’s monthly ether options expiry is $1.04 billion, but the actual figure will be much lower as bulls have been overly optimistic. These traders may have been fooled by the short-term jump to $2,950 on May 4th because their bets on the May 27th option expiry are above $3,000.
The drop below $1,800 surprised the bulls as virtually none of the May 27th call options were placed below that price level.
Ether Options Pool Open Interest on May 27th. Source: CoinGlass.
The call-to-put ratio of 0.94 shows a slight dominance of open interest in $540 million put (sell) options compared to $505 million call (call) options U.S. dollar. However, since Ether is worth around $1,800, any bullish bet is likely worthless.
If the price of Ether stays below $1,800 at 8:00 UTC on May 27, none of the $505 million call options will be available. This difference arises because the right to buy Ether at $1,800 or more is worth nothing if Ether is trading below that level at expiration.
The Bears plan to win $325 million
Below are the three most likely scenarios based on current price action. The number of option contracts available on May 27 for call (bullish) and put (bearish) instruments varies by expiry price. The imbalance in favor of each side is the theoretical gain:
$1,600 to $1,700: 0 calls versus 230,000 puts. Net result in favor of puts (bearish) of $370 million.
$1,700 to $1,800: 50 calls versus 192,300 puts. Net income in favor of the Bears by $325 million.
$1,800 to $2,000: 3,300 calls versus 150,000 puts. Net result in favor of puts (bearish) by $280 million.
This rough estimate accounts for puts used in bearish bets and calls only in neutral or bullish trades. However, this oversimplification ignores more complex investment strategies.
For example, a trader could sell a put option and effectively gain positive exposure to ether above a certain price, but unfortunately there is no easy way to measure this effect.
The bulls should throw in the towel and focus on the June expiry date
Ethereum bears need to keep the price below $1,800 on May 27th to make $325 million in profit. On the upside, the bulls need a boost above $1,800 at best to reduce the damage by $45 million.
On May 26, Ethereum bulls were liquidated in $160 million leveraged long positions, requiring them to have less margin to push the price higher. That being said, the bears will no doubt attempt to sink Ethereum below $1,800 before the options expire on May 27th.
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