Losing the $3,000 mark just days before Friday's $1.55 billion ETH options expiry nearly doomed Ether longs, but derivatives data shows bulls are still in favor.
Ether (ETH) has been in a bearish trend since early September, and this week's Evergrande-led market crash drove the price below $2,700 on Sept.20, its lowest level in 47 days. Curiously, just three weeks ago, Ether was testing the $4,000 psychological barrier, but this changed after mounting crypto regulatory concerns and the fear of China's debt markets triggering a global sell-off intensified.
This week U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler spoke to the Washington Post about renewed plans to regulate the crypto sector and the growing stablecoin market.
Ether's negative price trend reversed on Sept. 22 after U.S. Federal Reserve Chairman Jerome Powell confirmed the continuation of the central bank's monthly bond purchasing program. Powell also made clear that no interest rate hike should be expected in 2021.
Even though the current $3,000 level represents a 25% retraction from the recent $4,000 peak, Ether price still reflects a 215% gain in 2021 and the network's adjusted total value locked (TVL) jumped from $13 billion in 2020 to $60 billion, signaling strong adoption despite surging gas fees.
As shown above, bulls got caught by surprise because 72% of call (buy) instruments were placed at $3,200 or higher. Consequently, if Ether remains below that price on Friday, only $260 million worth of neutral-to-bullish call options will be activated on the expiry.
A call option is a right to sell Bitcoin at a predetermined price on the set expiry date. Thus, a $3,200 cut option becomes worthless if Ether remains below that price at 8:00 am UTC on Sept. 24.
Bulls still have an advantage in Friday's $1.55 billion expiry
The 1.48 call-to-put ratio represents the difference between the $920 million worth of call (buy) options versus the $620 million put (sell) options. This bird's eye view begs a more detailed analysis because some bets are far-fetched considering the current $3,000 level.
Below are the four most likely scenarios considering the current Ether price. The imbalance favoring either side represents the theoretical profit from the expiry. The data below shows how many contracts will be activated on Friday, depending on the ETH price:
- Between $2,700 and $2,900: 61,900 calls vs. 72,000 puts. The net result is $27 million favoring the protective put (bear) instruments.
- Between $2,900 and $3,000: 79,900 calls vs. 52,200 puts. The net result is $80 million favoring the call (bull) options.
- Between $3,000 and $3,200: 82,500 calls vs. 37,300 puts. The net result is $136 million favoring the call (bull) options.
- Above $3,200: 99,600 calls vs. 20,200 puts. The net result favors the call options by $255 million.
This raw estimate considers call options being exclusively used in bullish strategies and put options in neutral-to-bearish trades. However, investors typically use more complex strategies that involve different expiry dates. Moreover, there is no way to know if the arbitrage desks are fully hedged.
To win, bears need to keep Ether below $2,900
These two competing forces will show their strength, and the bears will try to minimize the damage. On the other hand, the bulls have decent control over the situation if the Ether price remains above $3,000.
The most important test will be the $2,900 level because bears have significant incentives to suppress the price at this level, even if momentarily. Although there's still room for additional volatility ahead of the expiry, the bulls seem to be better positioned.
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