Bitcoin (BTC) price has remained above $20,700 for 4 days, fueling bulls’ hopes for a further leg higher to $23,000 or even $25,000. Behind this optimistic movement is a decrease in inflationary pressure, confirmed by the wholesale prices of goods for December 2022, published on January 18.
The US Producer Price Index, which measures final demand prices across hundreds of categories, also fell 0.5% from a month earlier.
Eurozone inflation also stood at 9.2% year-on-year in December 2022, marking the second consecutive decline since the all-time high of 10.7% recorded in October. A milder-than-expected winter reduced the risk of gas shortages and softened energy prices, raising analysts’ hopes of a “soft landing.” According to analysts, a soft landing would prevent a deep recession and possibly convince central banks to stop raising interest rates.
The $580 million BTC options expiration on Jan 20 this week looks like an easy win for bulls as the astonishing 23% 7-day rally above $21,000 made most of bearish bets lose value. The recent move has hodlers calling for a market bottom and the potential end of the bear market, but the options market could have the answer.
Can Bitcoin Options Help Bulls Secure the $20,000 Floor?
It may seem like a distant reality right now, but Bitcoin was trading below $17,500 just 7 days ago. As the weekly expiration of the options approaches, on January 20, bullish bets are about to pay off, while bears will see their options lose value as the deadline looms over them.
The bears’ main hope is the possibility that the US Federal Reserve (FED) will raise interest rates by 50 basis points at the next meeting, but that won’t happen until February 1st. The latest data on US retail sales have shown a decline of 1.1% in December, the second consecutive cut in spending. The odds are increasingly in favor of a 25 basis point rise in interest rates, a sign that the central bank’s effort to curb inflation is achieving the expected results.
If the bulls gain on January 20, they are likely to add buying pressure and feed into the $20,000 support level.
Bitcoin Bears Caught Totally Unprepared
Open interest for the January 20 options expiration is $580 million, but the actual figure will be lower as the bears were decimated after Bitcoin broke $20,000. The bulls are in full control, even if their payout is higher starting at $21,000.
The 1.18 put to call ratio reflects the imbalance between the $150 million of open interest in call options and the $125 million in put options. If the Bitcoin price sustains above $17,000 at 8:00 am UTC on January 13, less than $2 million of these put (sell) options will be available. This difference occurs because the right to sell Bitcoin at $16,500 or $15,500 is worthless if BTC trades above that level at expiration.
A Bitcoin at $21,000 would give bulls a profit of $220 million
Below are the three most likely scenarios based on current price action. The number of option contracts available on January 20 for buy (bullish) and sell (bearish) instruments varies depending on the expiration price. The imbalance that favors each side constitutes the theoretical benefit:
- Between USD 19,000 and USD 20,000: 7,500 purchase options (calls) vs. 1,700 put options. The net result favors the call instruments (bullish) by USD 110 million.
- Between USD 20,000 and USD 21,000: 800 purchase options (calls) vs. 8,100 put options. The net result favors call instruments (bullish) by USD 165 million.
- Between USD 21,000 and USD 22,000: 10,600 purchase options (calls) vs. 200 sale options (puts). The net result favors the bulls by $220 million.
This rough estimate considers call options used in bullish bets and put options exclusively in trades between neutral and bearish. Even so, this oversimplification does not take into account more complex investment strategies.
For example, youA trader could have sold a call option, gaining negative exposure to Bitcoin above a specified price, but unfortunately, there is no easy way to estimate this effect.
Bitcoin bears need to push the price below $20,000 on Friday to minimize the loss. On the other hand, the bulls can double their profits if they push the price above $21,000 on January 20 and take a profit of $220 million.
The 7-day rally towards $21,300 liquidated $1.2 billion in leveraged short (sell) futures contracts, so they could have less margin needed to subdue the Bitcoin price.
For now, the bulls are well positioned to benefit from the weekly BTC options expiration and use the gains to defend the $20,000 support.
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