This is why holding $20.8K at the expiry of $1B Bitcoin Options this week will be crucial

Bitcoin (BTC) experienced a 16.5% correction between August 15 and 19 as it tested the $20,800 support. While the drop is terrifying, in reality a price difference of $4,050 is relatively insignificant, especially considering Bitcoin’s 72% annualized volatility.

Currently, the volatility of the S&P 500 is 31%, which is significantly lower, yet the index is down 9.1% between June 8th and June 13th. Comparatively speaking, then, the index of large US-listed companies faced a more abrupt move, which it has been adjusted for the historical risk metric.

Earlier this week, crypto investor sentiment took a hit after weaker conditions in China’s property markets forced the central bank to cut its benchmark five-year lending rate on Aug. 21. In addition, a strategist at Goldman Sachs’ investment bank said that inflationary pressures would force the Federal Reserve to further tighten the economy, negatively impacting the S&P 500.

Regardless of the correlation between stocks and bitcoin, which currently stands at 80/100, investors tend to seek protection in the US dollar and inflation-linked bonds when they fear a crisis or stock market crash. Known as the “flight to quality,” this move tends to increase selling pressure in all risky markets, including cryptocurrencies.

Despite the bears’ best efforts, Bitcoin failed to break below the $20,800 support. This move explains why the August 26 Bitcoin monthly options expiration of $1 billion could benefit bulls despite the recent 16.5% loss in 5 days.

Most bullish bets are above $22,000

Bitcoin’s steep correction after failing to break the $25,000 resistance on Aug. 15 surprised the bulls as only 12% of monthly expiry call (buy) options were placed above $22,000. Thus, Bitcoin bears are better off despite having placed fewer bets.

Bitcoin Options Aggregate Open Interest for August 26th. Source: CoinGlass

A broader view using the 1.25 call-to-put ratio shows more bullish bets as the call (buy) open interest is at $560 million versus the $450 million put (sell) ) options. However, with Bitcoin currently below $22,000, most bullish bets are likely to become worthless.

For example, if the price of Bitcoin stays below $22,000 at 8:00 UTC on August 26, only $34 million worth of these put (sell) options will be available. This difference arises because the right to sell bitcoin below $22,000 serves no purpose if it is trading above that level at expiration.

Bulls could secure a profit of $160 million

Below are the four most likely scenarios based on current price action. The number of option contracts available on August 26 for call (bull) and put (bear) instruments varies by expiry price. The imbalance in favor of each side represents the theoretical gain:

• Between $20,000 and $21,000: 1,100 calls vs. 8,200 puts. The net result favors bears by $140 million.
• Between $21,000 and $22,000: 1,600 calls vs. 6,350 puts. The net result favors bears by $100 million.
• Between $22,000 and $24,000: 5,000 calls vs. 4,700 puts. The net result is balanced between bulls and bears.
• Between $24,000 and $25,000: 7,700 calls vs. 1,000 puts. The net result favors the bulls by $160 million.

This rough estimate takes into account the call options used in bullish bets and the put options used exclusively in neutral to bearish trades. Nevertheless, this simplification ignores more complex investment strategies.

Holding $20,800 is crucial, especially after bulls in the futures market are liquidated

Bitcoin bulls need to push the price above $22,000 on Aug. 26 to even the scales and avoid a potential $140 million loss. However, Bitcoin bulls had liquidated $210 million worth of leveraged long futures positions as of Aug. 18, leaving them less inclined to push the price higher in the short-term.

With this in mind, the most likely scenario for August 26 is the $22,000-$24,000 range, which offers a balanced outcome between bulls and bears.

If bears show some strength and BTC loses the critical $20,800 support, losing $140 million on the monthly expiration will be the least of their problems. Additionally, the move would invalidate the previous low of $20,800 on July 26, effectively breaking a seven-week uptrend.

The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading movement involves risk. You should do your own research when making a decision.

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