97% of the $8.3 billion in Bitcoin put options expire worthless at a $102,000 BTC price.

Short covering above $105,000 could trigger a Bitcoin price rally to new highs.

Key takeaways:

* 97% of the $8.3 billion in Bitcoin put options will expire worthless at a $102,000 BTC price.

* Short covering above $105,000 could trigger a Bitcoin price rally to new highs.

Bitcoin (BTC) rose above $101,000 on May 8, reaching its highest level in over three months. The 4.6% daily BTC price gain triggered $205 million in liquidations of bearish futures positions and eroded the value of nearly every put (sell) option. Traders now question whether Bitcoin is poised to break its $109,354 all-time high in the near term.

The aggregate Bitcoin put (sell) option open interest for the next three months stands at $8.3 billion, but 97% of those have been placed below $101,000 and will likely expire worthless. Still, this does not mean every put options trader was betting on Bitcoin’s downside, as some may have sold those instruments and profited from the price gains.

Among the largest option strategies traded at Deribit is the “bull put spread,” which involves selling a put option while simultaneously buying another put at a lower strike price, capping both maximum profit and downside risk. For example, a trader aiming to profit from higher prices might sell the $100,000 put and buy the $95,000 put.

Cryptocurrency traders are known for their exaggerated optimism, and this is reflected in the leading strategies on Deribit’s options markets, such as the “bull call spread” and the “bull diagonal spread.” In both cases, traders anticipate Bitcoin prices at expiry to be equal to or higher than the options traded.

$100,000 Bitcoin boosts bullish options, but shorts may resist

If Bitcoin sustains the $100,000 level, most bullish strategies will yield positive results in the May and June options expiries, giving traders additional incentives to support upward momentum. However, there is the possibility that sellers (shorts) using futures markets will exert their influence to prevent a new Bitcoin all-time high.

Related: Coinbase to acquire options trading platform Deribit for $2.9B

The aggregate open interest on Bitcoin futures currently stands at $69 billion, indicating substantial demand for short (sell) positions. At the same time, higher prices might force bears to close their positions. However, this “short covering” effect is significantly muted in fully hedged positions, meaning those traders are not particularly sensitive to Bitcoin price movements.

For instance, one could buy spot Bitcoin positions using margin or spot exchange-traded funds (ETFs) and simultaneously sell the equivalent in BTC futures. Known as the “carry trade,” this strategy is delta neutral, so the profit comes regardless of price swings, as the monthly Bitcoin futures trade at a premium to compensate for the longer settlement period.

The Bitcoin futures premium has been below 8% for the past three months, so the incentives for the “carry trade” have been limited. Hence, it is likely that some form of “short covering” will occur if Bitcoin surges above $105,000, which greatly improves the odds of a new all-time high over the next couple of months.