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Bears are in big trouble because ETH bulls are expected to pocket $115 million from Friday’s option expiry.
Since September 1, Ether (ETH) has been trapped in a bearish regression channel, which it is currently attempting to break through.
Despite these challenges, ETH bulls are expected to profit $115 million on the weekly Ether options expiry on Oct. 8. The 21 percent increase over the last week was enough to wipe out the entire $250 million worth of neutral-to-bearish put options.
Regulatory fear limits the upside
Understandably, negative headlines about increased regulatory scrutiny of cryptocurrency may have weighed on prices last month, especially since China outright banned all cryptocurrency activity.
Major cryptocurrency exchanges, such as Binance and Huobi, have suspended most of their services in mainland China, and two of the largest Ethereum mining pools have been forced to shut down completely.
The negative press followed.
Founder of Citadel Securities, one of the world’s biggest market-making firms, said the company does not trade cryptocurrencies due to the sector’s regulatory uncertainties. The Russian State Duma Committee on Financial Markets chairman is also talking about ramping up regulations to protect retail investors, and so on.
Based on the negative newsflow, it is possible to understand why bears placed 86% of their bets at $3,200 or lower. However, the past weeks have definitively caused those put (sell) options to lose value quickly.
The Oct. 8 expiry will be a strength test for bears because any price above $3,500 means a bloodbath with the absolute dominance of call (buy) options.
At first glance, the $250-million neutral-to-bearish instruments outnumbered the $210-million call (buy) options by 16 percent.
The call-to-put ratio, however, is misleading because the recent ETH rally will likely wipe out the majority of their bearish bets if Ether remains above $3,500 at 8:00 a.m. UTC on Friday. If ETH is trading below $4,000, a right to acquire it at that price has no value.
Bears should throw the towel and take the $115 million loss
Notably, 94 percent of put options, which give the buyer the right to sell Ether at a predetermined price, were priced at $3,500 or less. If ETH trades above that price on Oct. 8, these neutral-to-bearish instruments will become worthless.
Given the current price levels, the four most likely scenarios are as follows, with the imbalance favouring either side representing the potential profit from the expiry.
Depending on the expiry price, the data shows how many contracts will be available on Oct. 8.
- Between $3,100 and $3,300: 14,300 calls vs. 9,800 puts. The net result is somewhat balanced between bulls and bears;
- Between $3,300 and $3,500: 21,650 calls vs. 1,900 puts. The net result favors bulls by $66 million;
- Between $3,500 and $3,700: 32,050 calls vs. 0 puts. The net result favors bulls by $115 million;
- Between $3,700 and $3,900: 43,300 calls vs. 0 puts. Bulls profit increases to $165 million.
This crude estimate considers call (buy) options used in bullish strategies and put (sell) options exclusively in neutral-to-bearish trades. However, this oversimplification disregards more complex investment strategies.
A trader, for example, could have sold a put option, effectively gaining positive exposure to Ether above a certain price. Unfortunately, there is no simple way to estimate this effect.
According to the above estimate, pressing below $3,500 results in a $47 million gain for the bear. Bulls, on the other hand, could increase their advantage by $49 million if the Oct. 8 options expiry price rises above $3,800.
Bulls currently have complete control heading into the Oct. 8 expiry, and the incentives for both sides to try to push the price $200 above or below appear balanced. As a result, bears should throw in the towel and regroup for next week’s expiration.