Bulls gained an advantage in July’s $1.26billion monthly options expiry by virtue of Ether (ETH’s) 53% rally from July 13-18. This was done by Ethereum developers who set a tentative date to “Merge” a transition from the cumbersome proof-of work (PoW), mining mechanism.
Chart of the Ether USD price index at 12 hours. Source: TradingView
Some analysts believe that Ether could achieve “ultra-sound money” status by removing the extra ETH issuing required to finance traditional mining consensus’s energy costs.
The issuance on Beacon Chain will be approximately 1,600 Ethereum per day, which is a significant decrease in inflation from 13,000 ETH/day on PoW. To become Ultrasound money, Merge will have an impact on the monetary policies of Ethereum. (10/15) pic.twitter.com/9hWjhuGpNK
— Akshay Jain (@akshayjain865) July 25, 2022
It is still unclear if sound monetary policy revolves around continuously changing the issuing or burning rules. However, it is clear that the video conference of the Ethereum developers on July 14 helped propel the ETH price.
Multiple speculations arose about whether Ether may be aiming for its old all-time high on July 26th, after a sudden spike in Ethereum network active address numbers. Santiment, an analytics firm, reported that there were 1.06 million active addresses per day in the 24-hour period. This surpasses the 2018 high of 718,000. Though theories such as that Binance was doing a maintenance sweep emerged, nothing has been confirmed.
According to Coinglass data, the main victims of Ether’s remarkable 20% recovery on July 27, were leveraged bearish trader (shorts), who suffered $335 million in total liquidations at derivatives markets.
Bears bet below $1,600
Open interest for Ether’s July month options expiry is $1.27 Billion, but this number will likely be lower because bears were too optimistic. After ETH fell below $1,300 between June 13-16, these traders became too complacent.
Bears were surprised when the pump topped $1,500 on July 27, because only 17% have placed put (sell) options above that price.
For July 29, Ether options have an aggregate open interest of $29. Source: CoinGlass
The 1.39 ratio of call-to-put shows that the $730million call (buy) open rate is dominant over the $530million put (sell). However, Ether is close to $1,600 so most bearish bets are likely to become worthless.
Only $80 million of put (sell) options are available if Ether’s price is above $1,500 on July 29 at 8:00 UTC. This is because a right of selling Ether at $1500 or less on expiry is worthless if Ether trades higher than that level.
Bulls can be content even at $1,600
Based on current price action, the following are the most likely scenarios. The expiry price will determine the number of options contracts that are available for call (bull) or put (bear), depending on which instrument is being traded. The theoretical profit is the result of an imbalance in favor of each side.
The difference between $1,400 to $1,500 is 120,400 calls and 80,400 put. The net result favors bull call instruments by $60 million. Between $1,500 to $1,600: 160,000. Calls vs. 55,000 put. Bulls are favored by $160million. Between $1,600 and $1700, 187,100 calls vs. 43,000. puts. The net result favors bull call instruments by $230 millions. Between $1,700 & $1,800: 220 800 calls vs. 40000 puts. The advantage of bulls increases to $310million.
This rough estimate includes the put options in bearish bets as well as the call options in neutral-to bullish trades. This oversimplification ignores complex investment strategies.
A trader might have sold a put option to gain positive exposure to Ether above a certain price. Unfortunately, it’s not possible to quantify this effect.
Bears should give up and concentrate on August’s expiry
To make a decent profit of $230 million, Ether bulls must keep the price above $1600 by July 29. To reduce the damage to $60,000,000, the bears need to push the price below $1,500.
Bears shouldn’t have much leverage to push ETH prices lower after the $330 million worth of leverage short positions were liquidated on July 26th and 27th. Bulls will be better placed to drive ETH higher once the July 29th monthly options expire.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.