Holders have been disappointed by Ether (ETH’s) performance in the past three months. The altcoin was able to test $1,800 support after the 50% correction on April 3.
Kraken: Ether/USD 1-day chart TradingView
Investors were seeking refuge in the United States dollar due to volatility in stocks. The DXY index rose to its highest point in 20 years on May 13th. DXY compares the USD to a basket of major currencies including the British Pound (GBP), Euro (EUR) or the Japanese yen(JPY).
The five-year U.S. Treasury yield traded at 3.10% on May 9, which is the highest level since August 2018. This signals that investors are looking for higher returns to offset inflation. The macroeconomic data partially explains Ether’s downturn by reflecting risk-averse sentiment among investors.
A seven-block chain reorganization on Ethereum’s Beacon Chain on 25 May caused panic among Ether traders. Due to a competing block receiving more support from network participants, a valid transaction sequence was wiped off the chain. This is not a common situation and could have been caused by a bug or miner with high resource.
According to Coinglass data, the main victims of Ether’s 11% price correction are leverage traders (longs), who saw $160,000,000 in aggregate liquidations on derivatives exchanges.
Bulls bet at $2,100 or higher
Open interest for Ether’s May monthly options expiry date is $1.04 trillion, but this number will likely be lower because bulls were too optimistic. The traders may have been deceived by the temporary pump to $2950 on May 4, but their bets for May 27 options expiry exceed $3,000.
Bulls were taken aback by the drop below $1,800. This is because almost none of the call (buy), options for May 27 were placed below this price level.
For May 27, Ether options total open interest Source: CoinGlass
The 0.94 ratio of call-to-put shows that the $540m put (sell) open interest is slightly more dominant than the $505m call (buy). However, Ether is close to $1,800 so any bullish bet will likely become worthless.
The $505 million call options won’t be offered if Ether’s price is below $1,800 on May 27th at 8:00 UTC. This is because a right of buying Ether at $1800 or more on expiry will be null if Ether trades below this level.
Bears set their sights on a profit of $325 million
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.
Between $1,600 & $1,700: 0 calls against 230,000 puts. The net result favors bear (or put) instruments by $370million. Between $1,700 to $1,800: 50 call vs. 192,300 puts. The net result favors bears with $325 million. Between $1,800 and $2,000: 3,300 call vs. 150,000 put. The net result favors bear instruments by $280 millions.
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.
Bulls should focus on June and not throw in the towel.
To make a profit of $325 million, Ether bears must keep the price below $1800 by May 27. To reduce the damage by $45million, the bulls need to push the price above $1,800.
The $160 million worth of leveraged Ether long positions that were held by bulls was liquidated on May 26. This means they have less room to push the price higher. Despite this, bears will no doubt try to push Ether below $1800 before the May 27 expiry of the options.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.