Ethereum bulls likely to profit $130 million on ETH options despite two-week slump

Investors in Ether (ETH), have nothing to complain about after the 344% gains achieved between 2021 and Nov. 24, 2021. Analysts fear that the $4,000 resistance testing on Nov. 19 may be forming a downward channel that aims for $3,600 by mid December, an 18% correction to the current $4,400 price.

Despite outperforming Bitcoin by 16% over the past month and the ETH/BTC exchange pair reaching 10-week highs of $1,050, Ether appears to be having trouble with its own success.

Bitstamp price in Ether/USD Source: TradingView

Users continue to complain that Ethereum gas fees are too high, with an average of $45 per week over the last three weeks. Despite how problematic this can be, it is clear that Ethereum continues to be the most popular platform for decentralized finance (DeFi), and non-fungible tokens markets (NFT).

I tried to purchase something for $5 with eth. Gas fees cost $480.45. We are not certain that the Airbnb product manager isn’t the one who created Ethereum.
— Chris Bakke (@ChrisJBakke) November 17, 2021

Ether’s rally is still limited by the increasing regulatory uncertainty in the United States. The Securities and Exchange Commission (or SEC) clarified on Nov. 24 that the focus of the cryptocurrency panel at the Dec. 2 public meeting would be on the regulatory framework.

Ether’s price has not been able to fall despite the burning of one million ETH since August’s implementation of EIP-1559. Ether is an inflationary asset, as the network produces approximately 5.4 million ETH annually. Ether’s value has risen by 16% against Bitcoin since Oct. 25, partly reflecting this impact.

Bullish calls dominate Friday’s ETH options expiry

Even though the price of $4,400 has fallen 10% since Nov. 10, when it was at $4,850, the Ether call (buy), options still dominate Friday’s expiry.

Open interest in Ether options for Nov. 26 is a total of 85% Source: Coinglass

The Nov. 26 expiry is represented by the green area, which represents the $820 million call options (buy). There’s an 87% difference between the $440million puts (sell) instruments and this.

The 1.87 call-toput ratio should not however be taken as a literal number, since 77% of bullish bets will be lost due to the recent ETH fall. If Ether is priced below $4,400 by 8:00 UTC on Nov. 26, then only $165 million worth (buy) call options will be available at expiry.

Also, it doesn’t make sense to have the right to purchase Ether at $4.400 or $4.600 if Ether is trading below that price.

To balance the scales, bears require sub-$4,200ETH

Based on current price action, here are the three most likely outcomes. The expiry ETH price will determine the number of options contracts that are available for bulls (call) or bears (put) instruments on Nov. 26. The theoretical profit is the result of an imbalance in favor of each side.

Below $4,100: 15,400 call vs. 15,200 put. The result is balanced. Between $4,200 to $4,500: 38.400 calls vs. 8.800 puts. The net result favors the call (buy), instruments by $130 million. Above $4,500: 50.200 calls vs. 2.300 puts. The net result favors call (bull), instruments by $215 millions.

This rough estimate includes call options used in bullish bets, and put options only in neutral-to bearish trades. This oversimplification ignores complex investment strategies.

A trader might have sold a put option to gain Ether exposure above a certain price. Unfortunately, it’s not possible to accurately estimate the effect.

Both sides are motivated to change the price

To balance the books and prevent a $130million loss, bears require a 7.5% drop in price from $4,400 to below $4,100. To increase their profits by $85million, bulls require a 2.3% price rise to $4,500.

Traders should be aware that sellers can exert a lot of pressure on the price, which is often ineffective in bullish markets. Options market incentives favor the price range of $4,200-4,500, which gives bulls a $130 million profit Friday, November 26th.

Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.

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