Bitcoin bulls and bears prepare for end-of-year $10B BTC options expiry

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Bitcoin’s (BTC) market is preparing for a $10.1 billion options expiry, a significant event set to occur on Dec. 29 at 8:00 am ET. The latest data indicates that call (buy) options hold a clear advantage, but bears could significantly limit their losses by pushing Bitcoin’s price below $42,000.

Both sides have incentives to influence Bitcoin’s spot price, but as the deadline approaches, one can gauge the outcome based on the expiry price. The options market leader, Deribit, boasts an impressive $7.7 billion open interest, but the surprise comes from the runner-up, the Chicago Mercantile Exchange (CME), with $1.38 billion. The CME’s open interest is more than double that of OKX, which is in third place with $630 million.

Spot Bitcoin ETF expectations gave bullish options an edge

The impending approval of a spot Bitcoin exchange-traded fund (ETF) in January has a substantial impact on the December options expiry. The Securities and Exchange Commission (SEC) has notably changed its approach in how it engages with ETF proponents. Instead of outright rejections, the SEC has been actively engaging in dialogue with ETF creators. This shift in approach is a positive signal and raises expectations of potential ETF approval in January. This alone explains why bears are unlikely to succeed in suppressing Bitcoin’s price below $40,000 ahead of the year-end BTC options expiry.

In another significant development, Binance’s recent plea deal with the U.S. Department of Justice and regulators signifies the evolving cryptocurrency landscape toward compliance and Anti-Money Laundering practices. This development indicates the increasing integration into the mainstream financial ecosystem, which also bolsters the odds of spot ETF approval, especially after changes on the Grayscale Investments’ board and the subsequent refiling of its request to convert the Grayscale GBTC Trust.

The aggregate open interest for the December options expiry stands at $10.1 billion. However, it’s projected that the final amount will be much less, as the recent rally above $40,000 caught bearish investors off guard, as evident from the Deribit Bitcoin options interest chart.

Deribit Bitcoin Options Open Interest for Dec. 29. Source: Deribit

The combined open interest of Deribit and CME options is $9 billion, although put (sell) options are underrepresented by 32%, reflecting the imbalance compared to the $5.4 billion in call (buy) open interest. Still, with Bitcoin gaining 25% since November, the majority of put (sell) options are likely to expire worthless.

If Bitcoin’s price remains near $43,100 at 8:00 am UTC on Dec. 29, only $185 million worth of these put (sell) options will be available. This difference occurs because the right to sell Bitcoin at $40,000 or $43,000 is useless if BTC trades above that level on expiry.

Bitcoin bears will want BTC price under$42,000 to minimize losses

Here are the four most likely scenarios based on the current price action. The imbalance favoring each side determines the theoretical profit. This crude estimate disregards more complex investment strategies, as there’s no straightforward way to estimate this effect.

  • Between $39,000 and $40,000: 3,000 calls vs. 17,700 puts. The net result favors the put (sell) instruments by $575 million.
  • Between $40,000 and $42,000: 13,800 calls vs. 11,600 puts. The net result favors the call instruments by $90 million.
  • Between $42,000 and $44,000: 24,200 calls vs. 7,200 puts. The net result favors the call instruments by $730 million.
  • Between $44,000 and $45,000: 27,900 calls vs. 1,800 puts. The net result favors the call instruments by $1.15 billion.

For the bears to level the playing field before the monthly expiry, they must achieve a modest 3% price decrease down to $41,900. In contrast, the bulls require a pump above $44,000 to secure a $1.15 billion advantage on Dec. 29. Still, the potential windfall for call option holders could become a catalyst for further price gains ahead of the ETF decision in January.