The expected volatility of $490M in ETH options will expire shortly after the Ethereum merger

Given the current state of the broader crypto market, some traders may be surprised to learn that Ether (ETH) has been trading higher for the past 17 days. On September 13, the price of Ether held firm near the $1,570 support level as the entire cryptocurrency market experienced a 10% decline.

Ether/USD price index. Source: TradingView

In less than 12 hours, the Ethereum network is slated to undergo its biggest upgrade, and the potential for massive volatility should not be overlooked. The transition to a proof-of-stake network will be a game changer for a number of reasons, including a 98.5% reduction in energy usage and a reduction in coin inflation.

During an upgrade, there is always a risk of multiple crashes, especially in complex systems like the Ethereum Virtual Machine processor. Although the upgrade was relatively smooth over previous versions of the testnet, it is impossible to predict the outcome of decentralized applications and second-layer solutions plugged into the Ethereum ecosystem.

That’s why the $490 million Ether options expiring on August 16 will put a lot of price pressure on both sides, although bulls look a little better as Ether nears $1,600.

Most of the tournament bets are placed under $1,600

Ether’s failure to break the $2,000 resistance on August 14 and its fall to $1,420 on August 29 signaled the bears to expect a continuation of the decline. That is evident as only 12% of the options placed (put) for September 16 were traded above $1,600. Therefore, Ether bulls are best positioned for the $490 million weekly options expiration.

Ether options include open interest for September 16. Source: CoinGlass

A broader view using a call to put ratio of 1.06 shows a relatively balanced position with $252 million in open interest versus $238 million in options. However, with Ether currently standing around $1,600, both sides are equally likely to move the needle.

If the price of Ether stays below $1,600 on September 16 at 8:00 am UTC, only $27 million of these call options will be available. This difference occurs because there is no benefit in the right to buy Ether at $1,600 or $1,700 when it expires if it is below that level.

Bears can pocket a profit of 100 million dollars

Below are the four most likely scenarios based on current price action. The number of option contracts available for the call (bull) and bear (bear) instruments on September 16 varies depending on the expiration price. The inequality for each side constitutes the theoretical profit:

  • Between $1,400 and $1,500: 33,000 calls compared to 2,600. The net result is $100 million in favor of bears.
  • Between $1,500 and $1,700: 29,600 calls compared to 29,000. The net result is a balance between bulls and bears.
  • Between $1,700 and $1,800: 49,200 calls compared to 3,800. The net result favors the bulls with 80 million dollars.
  • Between $1,800 and $1,900: 81,400 calls compared to 700. Bulls increased their winnings to $145 million.

This raw estimate only applies to call options and options used in leveraged bets on neutral-to-bear trades. However, this oversimplification ignores more complex investment strategies.

Macroeconomic turmoil may have helped ETH bears.

Ether bulls will want to maintain the price above $1,500 on September 16 to balance the balances and avoid the $100 million loss. However, ether bulls were not as lucky on September 12 as US stock markets fell by $1.6 trillion on September 13 due to a higher-than-expected inflation report.

There is absolutely no way to predict the outcome of an Ethereum merger, let alone its price impact. However, analysis shows that these three indicators should be observed by traders during consolidation.

One can never predict the consequences of unexpected delays or the positive impact of a smooth transition because investors could have already priced in the merger, triggering the “sell the news” phenomenon. So, both bulls and bears still have a shot at the September 16 weekly options expiration.

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