- Crypto markets have enjoyed significant price rallies over the past week.
- Recent options data raises questions about the sustainability of this rally.
- This article explains the terms needed to understand this data and what it means.
The Crypto markets have enjoyed a significant bounce since BlackRock filed to launch a spot Bitcoin exchange-traded fund (ETF) product on June 15.
But with $1.27 Billion in Bitcoin and Ethereum options set to expire, this recent price rally that has seen Bitcoin edge toward $31,000 and Ethereum towards $2,000 may soon be threatened.
The terminology around options can somewhat impede understanding how they may affect the market. The next section will explain some of these terms, including put, call, and put-call ratio (PCR). Readers who may be more experienced with options can skip to section 2.
Options Explained
In trading, options refer to contracts that give market participants the right to buy or sell an asset at a predetermined price called strike price on or before a fixed date. There are two main types of options contracts. These are call options and put options.
Call options refer to contracts that give the holder the right to buy an asset at the strike price. On the other hand, put options allow market participants to sell an asset at the strike price.
The price a buyer pays for an options contract is called a premium. Options have an expiration date predetermined when the contract is created. It is the last date the contract holder can exercise the right to buy or sell the underlying asset at the strike price, usually set on the third Friday of the expiration month.
Options can be used for several purposes, including price speculation and hedging against investment risks. In addition, understanding the options market, particularly the pull-call ratio (PCR), can also provide users with information about the general market sentiment.
The PCR is calculated by dividing the number of traded put options by the number of call options. Because more investors typically buy calls, a PCR of 0.7 is generally considered a good basis for evaluating market sentiment.
A PCR greater than 0.7 highlights that more investors are buying more puts than calls, indicating bearish market sentiment. On the other hand, a PCR less than 0.7 suggests that more investors are buying calls, indicating bullish market sentiment.
Now that we understand the meaning of these key terms, we can delve into how the $1.27 billion in Bitcoin and Ethereum options set to expire could affect asset prices.
Bitcoin and Ethereum Risk Price Drop
In a tweet on Friday, June 23, Greeks.live disclosed that 31,000 Bitcoin options worth $930 million with a PCR of 0.73 and 180,000 Ethereum options worth $340 million with a PCR of 0.86 were set to expire.
With the PCR indicating bearish market sentiment, Greeks.live asserted that in the worst-case scenario, the expiration of these options could push Bitcoin as low as $27,000 and Ethereum $1,750.
Greeks.live noted that the value of Bitcoin options positions rose nearly 50% this week, buoyed by the asset’s price rally.
On the Flipside
- Investment decisions should not be made solely based on PCR because several other factors can affect the price of an asset.
- PCR is not always accurate as it can be affected by factors, including the underlying asset’s volatility.
- Glassnode data recently indicated that market participants had booked about $537 million in profits from Bitcoin’s recent price rally.
Why This Matters
The PCR is an important metric that indicates market sentiment. At current levels, it suggests that traders expect prices to drop lower. While not always accurate, it offers information that could be considered in managing risk exposure.
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