Bitcoin Bulls Poised to Profit from Friday’s $195M BTC Options Expiration

Over the past ten days, the bitcoin price has tested the $44,500 resistance multiple times, marking a 16% drop from last week's local high of $53,000. Even the liquidation of $3.4 billion in long futures contracts that occurred on Sept. 7, when bitcoin fell 18.7%, wasn’t enough to quell bulls’ optimism, according to options market data.

Coinbase Bitcoin Price/USD Source: TradingView

If historical data is anything to go by, September has been a poor month for four of the past five years, with August trading at $47,110.

Adoption by institutional investors has been growing steadily regardless of price. On Sept. 13, Morgan Stanley, one of the largest banks in the United States, appointed a chief cryptocurrency analyst to its dedicated cryptocurrency research team.

But the most significant positive trigger for gains of 50% or more comes from the possible approval of exchange-traded funds (ETFs) by the U.S. Securities and Exchange Commission (SEC). Fidelity Digital Assets, the investment arm of a $4.2 trillion global fund manager, held a private meeting with several U.S. Securities and Exchange Commission officials on Sept. 8 to discuss the benefits and risks of bitcoin-tradable products.

Fidelity applied for a Bitcoin ETP called Wise Origin Bitcoin Trust in March 2021, but regulators continued to delay publishing their final decision. Additionally, since then, other companies have filed more than 20 similar filings, none of which have yet been analyzed by the SEC.

Cumulative open interest of Bitcoin options on September 3 Source: Byt.com

September 17 will be a test of the power of the bears, as 88% of the $310 million in put (sell) options are priced at or below $47,000. Therefore, if Bitcoin were to trade above that price on September 17, the neutral-to-bearish put option open interest would be cut to a paltry $36 million.

A put option is the right to sell bitcoin at a predetermined price on a set expiration date. Therefore, if Bitcoin were to trade above this price at 8:00 AM UTC on September 17, the $45,000 put would become worthless.

Bulls' apparent advantage is misleading

Looking at it more broadly, the bulls also have some advantage, as the call (buy) option instrument has a total open interest of $500 million, and based on the call (sell) ratio, there are 62% more calls than puts.

However, this data is misleading, as excessive optimism by the bulls could wipe out most of their bets. For example, if Bitcoin expires below $47,000, their open interest will be reduced to $34 million. After all, what good is buying Bitcoin at $52,000 if it’s trading below $52,000?

Below are the four most likely scenarios given current price levels. An imbalance in favor of either party represents the potential profit after maturity. The data below shows how many contracts will be executed on Friday, depending on the expiration price.

Between $45,000 and $46,000: 240 calls versus 1,80 puts. The net result is $78 million in favor of protective put instruments.

Between $46,000 and $48,000: The net outcome is balanced between bears and bears.

Between $48,000 and $50,000: 3,500 calls versus 620 puts. The net result was $143 million in favor of call options.

Above $50,000: 4,150 calls to 260 puts. The net result is a $195 million advantage fully dominated by bullish instruments.

This rough estimate takes into account that calls (buy) options are only used for bullish strategies and put (sell) options are only used for neutral to bearish trades. Unfortunately, real life is not so simple, as investors may have deployed more complex investment strategies.

Incentives are in place to encourage bulls to attempt a break above $50,000

Both buyers and sellers will flex their strength in the hours leading up to Friday's expiration, while bears will attempt to minimize losses by keeping prices below $48,000. On the other hand, if Bitcoin stays above these levels, the bulls will be well in control.

The highest pressure level for the bears is $50,000, and at this level, the bulls have a lot of incentive to dominate the weekly expiration and gain an objective advantage of $195 million.

There is still room for further volatility before Friday, and the bulls seem to have the upper hand.

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