The performance of Ether (ETH) in the last three months has not been very satisfactory for holders and the 50% correction since April 3 saw the altcoin test the $1,800 support for the first time since July 2021. .
Due to the volatility of equities, investors have sought refuge in the US dollar and on May 13 the DXY index reached its highest level in 20 years. The DXY compares the dollar against a basket of major foreign currencies, such as the British Pound (GBP), the Euro (EUR), and the Japanese Yen (JPY).
Additionally, the 5-year US Treasury yield hit its highest level since August 2018, trading at 3.10% on May 9, signaling that investors are demanding higher yields to offset inflation. In a nutshell, the macroeconomic data reflects a risk-averse sentiment on the part of investors and this partly explains the drop in the price of Ether.
A 7-block reorganization on the Ethereum Beacon Chain on May 25 has caused panic among Ether traders. A valid transaction sequence was removed from the chain due to a competing block gaining more support from network participants. Fortunately, this situation is not uncommon and could have arisen from a high-resource miner or a bug.
The main casualty of the 11% Ether price correction was leveraged traders (longs) who saw $160 million in liquidations added on derivatives exchanges, according to data from Coinglass.
The bulls placed their bets at $2,100 and above
The open interest for Ether monthly options expiry is $1.04 bln, but the actual figure will be much lower as the bulls were too optimistic. These traders might have been fooled by the short-lived rally to $2,950 on May 4 because their bets for the May 27 options expiry are beyond $3,000.
The drop below $1,800 caught the bulls by surprise because virtually none of the call options for May 27 have been placed below that price level.
The 0.94 ratio between calls and puts shows the slight dominance of the $540 million open interest in puts versus the $505 million in calls. However, with Ether hovering near $1,800, all bullish bets are likely to be worthless.
If the price of Ether stays below $1,800 at 8:00 UTC on May 27, none of the $505 million in call options will go into expiration. This difference occurs because an Ether call right at $1,800 or more is worthless if Ether trades below that level at expiration.
The bears aim for a profit of USD 325 million
Below are the three most likely scenarios based on the current price action. The number of option contracts available on May 27 for call (bullish) and put (bearish) instruments varies depending on the expiry price. The imbalance favoring each side constitutes the theoretical gain:
- Between $1,600 and $1,700: 0 call options vs. 230,000 put options. The net result favors put instruments (downside) by USD 370 million.
- Between $1,700 and $1,800: 50 call options vs. 192,300 put options. The net result favors the bears at $325 million.
- Between 1,800 and 2,000 dollars: 3,300 call options vs. 150,000 put options. The net result favors put instruments (downside) by USD 280 million.
This gross estimate considers put options used on bearish bets and calls exclusively on neutral or bullish trades. Even so, this oversimplification does not take into account more complex investment strategies.
For example, a trader could have sold a put option, effectively gaining positive exposure to Ether above a specific price, but unfortunately, there is no easy way to estimate this effect.
Bulls should give up and focus on June expiry
Ether bears need to keep the price below $1,800 on May 27 to lock in a $325 million profit. On the other hand, the best case scenario for the bulls calls for a rally above $1,800 to reduce the damage by $45 million.
Ether bulls liquidated $160 million of leveraged long positions on May 26, so they should have less room to drive the price higher. With that being said, the bears will no doubt try to keep Ether price below $1,800 ahead of the options expiry on May 27.
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