Strong Bitcoin and stocks rally position bulls for victory in Friday’s $860M options expiry

The 22% increase in Bitcoin (BTC), over the previous week is reason for celebration by bulls. The price is now pushing towards $46,000, and much to the surprise many, the $43,000 level has held steady despite volatility due to US inflation data on February 10.

Mixed feelings have been expressed on the macroeconomic side. On February 4, retail sales in the Eurozone fell by 2.1% year-on-year, compared to the 5.1% expected. The sudden increase in nonfarm payroll employment in the United States was 467,000.

Despite the strong than expected growth in China and America, investors are becoming more concerned about corporate earnings. Some big names have suffered a setback in the last few weeks, including Meta (FB), Delivery Heroes (DHER-DE) and Paypal (PYPL).

The Federal Reserve expects that today’s 7.5% annual U.S. consumer price inflation growth will reinforce its expectations for at least two interest rates hikes in 2022. Not many investors can get protection in treasuries, as the 5-year Treasury yield currently stands around 1.9%.

Bitcoin is still considered a risky investment, but its value is being discounted

The S&P 500 is just 5% away from its all-time high. This should make Bitcoin’s recent strength not surprising. Curiously, put (or sell) option instruments dominate the February 11 options expiry. However, bears were taken by surprise when Bitcoin price stabilised above $43,000 this week.

For February 11, 2018, Bitcoin options have an aggregated open interest of $11 million Source: CoinGlass

The call-to-put ratio gives a wider view that shows 14% advantage for Bitcoin bears. This is because the $400 million call (buy), instruments have a lower open interest than the $460 million put option (sell). The 0.86 call-to put indicator is misleading because most bearish wagers will be worthless.

If Bitcoin’s price is above $44,000 at 8:00 UTC on February 11, $55 million of the put (sell) options will still be available. This is because Bitcoin’s right to sell at $40,000 has no value if it’s trading higher than that level.

Bulls aim for $300 million in profit

Based on current price action, the following are the most likely scenarios. The expiry price will determine the number of options contracts that are available for bulls (call) or bears (put) instruments on February 11. The theoretical profit is the result of an imbalance in favor of each side.

Between $42,000 to $44,000: 4,550 calls and 1,750 puts. The net result favors the call (bull), instruments by $120 million. Between $44,000 and $46,000, 6,380 calls vs. 8,60 puts. Bulls are favored by $250 million. Between $46,000 and $48,000, 7,860 calls vs. fifty puts. The net result favors bull instruments by $350 millions.

This rough estimate includes the bullish options and neutral-to bearish options. This oversimplification ignores complex investment strategies.

A trader might have sold a call option to gain negative exposure to Bitcoin above a certain price. Unfortunately, it’s not possible to accurately estimate the effect.

Related: Bitcoin’s ‘fair value” rises to $50K as exchange stablecoin reserves reach $27B

Bears best case scenario remains unkind

To make a profit of $350 million on February 11, bitcoin bulls will need a pump that is at least $46,000. To reduce their loss to $120million, bears need a 4% drop in price from $45,600.

Given the recent weakness in corporate data, bitcoin bears don’t have any reason to increase their short positions. Bulls should show their strength and push the price higher than $46,000 on Friday, when options expire.

Bulls might need to make a $350 million profit in order to regain their confidence and reopen long-leverage futures. This could lead further upward pressure.

Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.