Bitcoin price has corrected, but bulls will profit from the expiration of $580 million worth of BTC options on Friday.

Bitcoin (BTC) price rose above $20,700 for 4 days, raising bulls’ hope for another leg to $23,000 or even $25,000. The upbeat move was driven by a decline in inflationary pressures, as confirmed by wholesale commodity prices in December 2022 on January 18.

The US producer price index, which measures final demand prices across hundreds of categories, also fell 0.5% from the previous month.

Eurozone inflation also fell to 9.2% year-on-year in December 2022, down from a record high of 10.7% in October. A milder-than-expected winter reduced the risk of gas shortages and softened energy prices, raising analysts’ hopes for a “soft landing.” Analysts say a soft landing would prevent a deep recession and perhaps convince central banks to rein in interest rate hikes.

This week’s $580 million BTC options expiring on January 20 look like an easy win for the bulls, as a surprise 7-day 23% rally above $21,000 has rendered most bear bets worthless. The last move has holders (or hodlers) calling the bottom of the market and the potential end of the bear market, but the options market may respond.

Could Bitcoin Options Help Bulls Secure $20,000 Floor?

It may seem like a distant reality right now, but Bitcoin was trading below $17,500 just 7 days ago. Bullish bets are about to pay off when weekly options expire on January 20, and bears will see their options depreciate as the deadline approaches.

The main hope of the bears is the possibility that the US Federal Reserve System (FED) will raise interest rates by 50 basis points at its next meeting, but this will happen only on February 1. The latest data on US retail sales showed a decline of 1.1%. It cut spending for the second time in a row in December. The odds for a 25 basis point rate hike are increasingly favorable, suggesting that the central bank’s efforts to curb inflation are having the desired effect.

If the bulls win on January 20, it is likely to increase the buying pressure and strengthen the $20,000 support level.

Bitcoin bears were caught completely off guard

Open interest for options expiration on January 20 is $580 million, but the actual figure will be lower as bears are wiped out after Bitcoin crosses $20,000. With payouts of $21,000 and up, bulls are in complete control.

Bitcoin options combine open interest for January 20. Source: Coinglass

A call-to-issue ratio of 1.18 reflects the imbalance between $150 million of call (call) open interest and $125 million of put (put) options. If the price of bitcoin remains above $17,000 at 8:00 AM UTC on January 13th, these put (sell) options will be worth less than $2 million. This difference occurs because the right to sell Bitcoin at $16,500 or $15,500 is worthless if BTC trades above this level at expiration.

$21,000 Bitcoin will give the bulls $220 million in profit

Below are the three most likely scenarios based on current price action. The number of option contracts available for call (bull) and put (bear) instruments on January 20 varies depending on the expiration price. The imbalance in favor of each party constitutes the theoretical profit:

  • Between $19,000 and $20,000: 7500 calls and 1700 calls. The net result favors $110 million worth of call (bull) instruments.
  • Between $20,000 and $21,000: 800 calls and 8100 calls. The net result favors $165 million worth of (bull) instruments.
  • Between $21,000 and $22,000: 10,600 calls against 200 calls. The net result is $220 million in favor of bulls.

This crude estimate takes into account call options used in bull bets and put options in neutral-to-bear trades only. However, this oversimplification ignores more complex investment strategies.

For example, a trader could sell a call option, effectively getting the negative impact of Bitcoin above a certain price, but unfortunately there is no easy way to quantify this impact.

Related: Bitcoin US PPI sees new 4-month high as retail sales data ‘big losses’

Bitcoin bears need to break below $20,000 on Friday to minimize losses. On the other hand, the bulls can double their gains by pushing the price above $21,000 on January 20 and making $220 million.

The 7-day rally toward $21,300 has wiped out $1.2 billion worth of short-term (sell) futures contracts, so less margin may be needed to push Bitcoin’s price lower.

Right now, the bulls are well positioned to take profits from BTC weekly options expiration and use the gains to protect the $20,000 support.