Bitcoin Cash
After popping above $50k, the Bitcoin price has reversed lower, and delighting the naysayers. However, I’m not convinced BTC/USD is breaking down. For the last two days, Crypto traders have been intently focusing on whether Bitcoin could hold its uptrend, and yesterday there were given their answer. BTC/USD slipped below an important trend line at $48,000, trading as low as $47,000 before running into buying. This has led many to call the end of the recent bull market and declare that BTC is heading back to $40k. I am not one of those.
Today, more than $2 billion of Bitcoin (BTC/USD) options are due to expire. Most of those are bullish call options set to profit if BTC closes above $50,000. I believe this playing a part in the current weakness. Many retail traders find options mystifying, and some believe they offer a binary outcome. And whilst a purchased option can indeed finish either in-the-money (a profit) or out-of-the-money (a loss), they forget that options traders hedge.
For instance, if you were to buy a call option for 1 BTC, with a strike price of $70,000 expiring in December (i.e. you believe that at, or before the expiry date, the price of Bitcoin will be greater than $70,000 plus the cost of the option), you’re immediate exposure would be far less than one coin. This is because $70k is way above the current price, and a lot can happen between now and the end of the year. As a result, if Bitcoin increases by $1,000, the option price (premium) rises at a much lower rate. This calculation is called delta and reflects the change in option premium relative to a change in the underlying price.
However, let’s assume the price of Bitcoin reaches $70,000 as it approaches expiry. The chance that BTC will be above the strike price increases. Furthermore, the option holder is running out of time. In this event, unless you hedge, the outcome is binary. At this stage, it’s 50/50 whether the call option will be in profit, and on that basis, the premium will change in value at half the rate of the underlying (Delta of 0.50). So here is what the option holder could do. If they sell 0.50 BTC at $70,000, they are (almost) guaranteed to generate some profit. If the price continues to go up and the option expires in in-the-money (profit), they will lose on the 0.50 short. However, they will have gained on the option contract of 1.0 BTC.
If, however, the Bitcoin price is below $70,000, the option expires worthless. But, the short position will be in profit. Although, whether this is enough to cover the cost of the option depends on how far below $BTC/USD is below $70,000. In my opinion, this could explain why the price has struggled at the $50k level for the last week. With time running out, savvy options traders may have chosen to sell Bitcoin as a way to minimise exposure and cover the cost of their option premium. So what happens after expiry?
In theory, once the options expire, there will be no need for call options holders to be short of BTC. In fact, those that hedged (sold Bitcoin) will need to cover their shorts (buy Bitcoin), which could push the price higher over the weekend. Of course, this is just a theory. But in my experience, market participants sometimes overlook the effect open options positions have on the price. The options market can often give clues as to where dealers will buy and sell the underlying contract and therefore is worth noting.
The daily chart shows the Bitcoin price has technically broken out of its uptrend. And in theory, this should lead to an extension lower towards the 19th of August, low at $44,530. However, ahead of expiry, I would recommend not getting too bearish. Even though the price may head lower today, I expect buying to emerge in the next day or two. Should the price climb above $48,500 and back into the trend channel, short-covering should follow. And in this event, I expect $50,000 will be easily reclaimed. Although, if by Sunday this is not the case, I will admit defeat and join the bear camp.
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