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Friday’s $540M Ethereum options expiry favors traders with targets at $5K

Ether (ETH) bulls are probably very pleased with the 368% gains accrued so far in 2021 and it seems like not a day passes where the altcoin doesn’t hit a new all-time high. 

Even with Ether on the path to $5,000, there are still plenty of concerns about the network’s capability to absorb the strong demand coming from the decentralized finance (DeFi) and non-fungible token (NFT) sector.

Another potential setback laying ahead is the United States Treasury report on stablecoin regulation released on Nov 1. The report stressed the necessity of Congress to “ensure appropriate federal prudential oversight on a consistent and comprehensive basis.”

In addition to this, competing networks offering interoperability with major DeFi projects have been gaining adoption, both in total value locked (TVL) and market share on smart contracts. As an example, this week Solana (SOL) rallied to a new $236 record high, surpassing Cardano (ADA) to become the fourth-largest cryptocurrency.

According to data from CryptoSlam, secondary sales of Solana NFT markets reached $495 million over the past three months but despite this, the Ethereum blockchain remains the most popular, with NFT secondary sales topping $1.76 billion in October.

Ether price on Coinbase in USD. Source: TradingView

By managing to stay ahead of the competition and creating a path to solve the scalability problem by migrating to a proof of stake network, Ethereum has lured some heavy investors. This includes Dallas Mavericks owner Mark Cuban, the Houston Firefighters’ Relief and Retirement Fund, and billionaire Barry Sternlicht.

The November 5, $540 million Ether options expiry may appear to be an uncontested victory for bulls, but this wasn’t the case a couple weeks ago.

Ether options aggregate open interest for Nov. 5. Source: Bybt

At first sight, the $300 billion put (sell) options dominate the weekly expiry by 20% compared to the $240 million calls (buy) instruments. Still, the 0.80 call-to-put ratio is deceptive because the recent rally will likely wipe out most bearish bets.

For example, if Ether’s price remains above $4,500 at 8:00 am UTC on Nov 5, only $1.5 million worth of those put (sell) options will be available at the expiry. There is no value in a right to sell Ether at $4,500 if it’s trading above that price.

Bulls are comfortable above $4,500

Below are the four most likely scenarios for the $540 million Nov. 5 expiry. The imbalance favoring each side represents the theoretical profit. In other words, depending on the expiry price, the quantity of call (buy) and put (sell) contracts becoming active varies:

  • Between $4,300 and $4,400: 6,870 calls vs. 6,000 puts. The net result is balanced between bulls and bears.
  • Between $4,400 and $4,600: 13,750 calls vs. 350 puts. The net result is $60 million favoring the call (bull) instruments.
  • Between $4,600 and $4,700: 18,500 calls vs. 50 puts. The net result is $85 million favoring the call (bull) instruments.
  • Above $4,700: 22,800 calls vs. 0 puts. The net result is complete dominance, with bulls profiting $107 million.

This crude estimate considers call options being used in bullish bets and put options exclusively in neutral-to-bearish trades. However, this oversimplification disregards more complex investment strategies.

For instance, a trader could have sold a put option, effectively gaining a positive exposure to Bitcoin above a specific price. But, unfortunately, there’s no easy way to estimate this effect.

Bears need a 6% price correction to reduce their loss

The only way for bears to avoid loss on Friday’s expiry is by pressuring Ether price below $4,400 on Nov. 5, down 6% from the current $4,660. So unless there is some concerning news or events announced before the weekly options deadline, bulls are likely to profit $85 million or higher.

Traders also have to factor in that during bull runs, the amount of effort a seller needs to impact the price is immense and usually ineffective. Currently, options markets data point to a considerable advantage from call (buy) options, fueling bullish bets for Ether and this increases expectations of a rally to $5,000.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.