Traders spent much of July coming up with pretty convincing explanations for why Bitcoin wasn’t moving. They argued that dense clusters of option contracts had boxed-in prices, and the dealers who sold those contracts were buying every drop and selling every rise to balance their books. Once contracts are removed, Bitcoin will finally be free to go elsewhere.
The contract has now settled for the second consecutive Friday, and Bitcoin is roughly where it was at the start. It traded just under $64,000 on Saturday, failing to sustain $66,000 and ending the week below the level that its positioning should protect. A very good explanation is over and what is left is very boring. Demand for Bitcoin is currently thin, and it is also thin on both sides of the market.
The option numbers that everyone pays attention to and what they tell us
On Deribit, which handles the bulk of cryptocurrency options trading, about 19,000 Bitcoin options worth about $1.2 billion expired at 8 a.m. UTC on Friday. The exchange set its maximum expiration pain at $64,500. Bitcoin started at $65,099 and reached $63,740 along the way, but it closed the day at $64,140 and was about $360 below that.
The previous Friday, there was an expiration of the same size, with the maximum pain level reaching $63,000, and over the next few days Bitcoin rallied towards $65,400. Two expirations, two opposites, and in both cases caused no visible pain at all.
The biggest pain is the numbers that are quoted week after week as if they were a force in themselves. An option is a contract that gives someone the right to buy or sell Bitcoin at a set price on a set date, and maximum pain is simply the price at which the person selling those contracts owes the least amount when it settles. This is a snapshot of where bets stack up, calculated from currently open contracts. There is no mechanism to push prices towards it.
The $1.2 billion figure deserves the same treatment. This is the Bitcoin face value referenced in the contract, and only a fraction of the funds are actually at risk. And because exchange data shows how many contracts remain in each strike, not who is on which side, it is not possible to say with confidence in what ways dealers were forced to hedge their settlements.
Confident claims about dealer positioning are almost always built on assumptions, and the growth of the options market has made getting them wrong costly. Ethereum contributed an additional $234 million to Friday’s settlement, with a maximum pain level of $1,875 and a put-call ratio of 1.29, demonstrating its appetite for a month of downside protection.
It’s easy to see what happened on Friday by looking at the trading data. CryptoQuant’s exchange-wide numbers track which side of the market is filling across the spread, giving a good indication of who’s in the hurry.
On both Thursday and Friday, sellers were in a hurry. The Coinbase Premium Index, which compares Bitcoin prices on the largest U.S. exchanges with offshore exchanges, fell to a discount of 0.088% on Friday, the widest since July 16 and a sign that U.S. buyers are pulling back.
Traders with leveraged long positions were forced to lose $45.9 million on Friday compared to $7.4 million on the short side, for an almost 6-to-1 imbalance.
Leverage itself remained subdued. The funding rate that longs pay leveraged shorts to maintain their positions averaged 0.0038% across exchanges on Friday, down from 0.0064% five days earlier and just barely above neutral. Open interest in futures and perpetual contracts ended at $22.35 billion, up from $21.26 billion at the previous expiration, and rose slightly on Friday even as prices fell 1.5%. A new position has arrived on the way.
The U.S. Spot Bitcoin ETF fell $225.2 million on Thursday, ending a seven-session trading session that had raised nearly $1 billion, with BlackRock’s IBIT accounting for $202.5 million of the reversal. The week still ended the week with about $274 million positive.
Stocks fell over the weekend and cryptocurrencies also fell as tensions between the US and Iran flared up again. The Crypto Fear and Greed Index fell three points to 28, and implied volatility fell towards 35%.
Only 9% of bets still survive.
Deribit’s board has nearly $5 billion in open interest with monthly expirations of July 31 at $70,000 and $72,000 strike prices, representing about 18% of the exchange’s entire $28 billion Bitcoin options book. Cole heavily dominates both strikes. As of July 20, about 27,000 contracts were trading at $70,000 and about 21,000 were trading at $72,000.
One structure accounts for most of it. Jean-David Péquignot, chief commercial officer at Deribit, described one block in which he bought 20,000 of the $70,000 calls and sold 20,000 of the $72,000 calls. This represents a total notional value of approximately $2.5 billion across the two legs.
This trade pays out if Bitcoin closes above $70,000, stops further payments above $72,000, and sells the higher strike price to offset some of the premium, making the upfront cost lower than buying the lower strike price outright. The person wearing it wanted a certain movement within a certain time frame, and they paid money to get it done.
There is a reason why this window was chosen. Jimmy Yang of institutional liquidity provider Orbit Markets tied call demand on July 31 to expectations for passage of the Clarity Act, and traders have been reducing demand since then.
Polymarket now estimates the bill’s chance of passage in 2026 at about 35% (down from more than 80% in February) after the bank-agriculture merger bill removed ethics provisions demanded by Democrats, prompting formal opposition from Sens. Chris Murphy, Chris Van Hollen and Jeff Merkley. Due to the August recess, the Senate has limited room to act.
The expiration date is also two days after the Federal Reserve’s decision. The FOMC will meet on July 28th and 29th, with a statement scheduled for Wednesday at 2pm ET, followed by Kevin Warsh’s press conference 30 minutes later.
There was no set of economic forecasts attached to the meeting, so the wording of the statement carries all the signals. Interest rates have been hovering between 3.50% and 3.75% for four consecutive sessions, and in the futures market there is about a one-third probability of a one-quarter point hike, making the price of a rate cut virtually zero.
Governor Lisa Cook has noted that inflation is running at 3.7%, while Vice Speaker Philip Jefferson and Governor Christopher Waller have both warned that they will reconsider policy if prices remain high.
For the $70,000 strike to end within the money, Bitcoin would need to rise about 9% in six days, and Deribit’s own odds give the price a 14.5% chance of reaching that level in July, while $72,000 has a 4.1% chance.
Gamma exposure, a measure of how aggressively dealers should adjust their hedges in response to price changes, is concentrated at $65,000 and $72,000. The nearby cluster is directly above the market and is quite small. The big ones are located far enough away that they exert little pull until Bitcoin closes most of the distance on its own.
So the biggest concentration of belief in the Bitcoin options market is at a price that the market has less than a 1 in 6 chance of giving itself, and the deadline is 48 hours after a central bank meeting that no one can call with confidence.
The two weekly expirations that made headlines this month have been resolved, but nothing has changed. Bitcoin’s range is all about those who appear on the spot market, but very few people appeared on the spot market last week.
(Tag translation) Bitcoin
