Effects of Options on Bitcoin Prices and May 2021 Price Prediction
Updated: Apr 26, 2021
Update 4/26/2021: This article does not provide a price prediction for Friday, April 30th. Based on options' strike prices discussed in this article, I believe that Bitcoin will be between $52,000 and $56,000 at the end of day this Friday. The reason for this is that most put options have a strike price of $52,000 and lower and most call options have a strike price of $56,000 and higher.
Anyone reading these posts will notice that I have been preoccupied with Bitcoin prices recently. The fact is, all crypto prices tend to trend with the price of Bitcoin, similar to how the price of gasoline trends with the price per barrel of oil. As someone who is heavily invested in crypto and is attempting to optimize my pattern trading skillset, I am always looking for the key to price fluctuations. I have found something that greatly correlates to the waxing and waning of Bitcoin's price.
The last Friday of every month is the primary expiration day for Deribit Bitcoin options. Over 90% of all Bitcoin options are on the Deribit exchange, so using their data is representative of Bitcoin options trading as a whole. The above chart highlights the rise and fall of Bitcoin prices in green and red, respectively, and shows major options expiry dates as vertical blue lines. The value of the options set to expire on each particular date are written in orange. The red and green arrows at the end of the chart are a prediction of upcoming price trends, but not of an actual price. Based on previous months, I believe we may hit a new all time high (ATH) price in May, but this article is focused on the timing of price fluctuations. For those especially curious, I do provide a price estimate below when discussing May 28th expiry options contracts.
In January and March the change from waning Bitcoin prices to waxing prices falls within one day of the options' expiry dates. In February, the change is 3 days later. From January until April, respectively, the number of days from Bitcoin's price beginning to decrease until options' expiry dates are as follows: 20, 5, 13 and 16. While not perfect, 14 days prior to options' expiry is a safe bet for the trend reversal in May. However, if a new ATH hits much sooner, we may see that reversal earlier.
Right now you may be thinking, "Why do options have such a great effect on the price of Bitcoin?" To answer that, I am going to have to cover a few fundamental properties of options.
Call Option: Seller of a call option contract promises to sell Bitcoin at the strike price of the contract. For example, if on expiration date the market price of Bitcoin is $55,000 and the strike price of the contract is $50,000, the buyer of the call option contract pays $50,000 to the seller for 1 bitcoin, $5,000 under market. However, if the price of Bitcoin is currently lower than the strike price, the contract expires worthless because the buyer can purchase Bitcoin at a lower price than the contract. When the contract is initially signed, the buyer pays a premium to the seller for the contract. Depending on strike price and expiration date, this premium can range from a very small amount of money to thousands of dollars.
Put Option: Seller of a put option contract promises to buy Bitcoin at the strike price of the contract. For example, if on expiration date the market price of Bitcoin is $55,000 and the strike price of the contract is $60,000, then the seller of the contract must pay $60,000 for 1 bitcoin to the buyer of the contract, which is $5,000 over current market value. However, if the price of Bitcoin is currently higher than the strike price, the contract expires worthless because the buyer of the contract can sell the bitcoin at a higher price than the contract stipulates. Like call options, the buyer of the contract pays a premium to the seller when the contract is initiated.
Above is a bar graph detailing how much open interest (number of open contracts) there is for Bitcoin options with an April 30th expiry. You can see that many people have call contracts at a strike price of $80,000. Those contracts will almost surely expire worthless. It is in the interest of the sellers of these contracts to keep Bitcoin's price down, so that they can collect contract premiums and not have to sell their Bitcoin. On the other side many people have open interest in put contracts ranging from $40,000 to $52,000. It is in the sellers of the put options interest to keep the price above the contracts' strike price so that they may collect premiums and not need to buy Bitcoin at an inflated price. This chart shows the "Max Pain Price" to be $56,000. This is the price that the maximum number of contract buyers will lose their money with contracts expiring worthless. Many of these contract sellers are "Market Makers", meaning they have a lot of money and a lot of Bitcoin, so they can heavily influence the price of Bitcoin by buying and selling large quantities. Contract open interest by strike price is not a perfect predictor of future prices, but it can give you an indication of what the price range will be on a future date.
The May 28th options contract expiry has a "Max Pain Price" of $60,000, as seen in the below chart. While many of the options contracts that will expire on this date haven't been purchased yet, it is fair to assume that between $55,000 and $60,000 is a healthy bottom for contract sellers. Based on current data I predict that this will be the price range on May 28th, but I will re-evaluate the open interest data closer to that date to substantiate or amend this prediction.
I wish to provide a few more details about options to help you understand why month end expiries are the most important. Month end options contracts are sold well in advance of contract expiration and have by far the most open interest. "Weekly's" are contracts that expire on a weekly basis and they tend to be sold only within one month of their expiration. They therefore do not effect the price of Bitcoin as greatly as the "Monthlies".
The below chart shows Deribit's dominance in the Bitcoin options market:
Finally, Here is a list of articles that support my findings in the first Bitcoin price chart presented in this article: