The 43% rally in Bitcoin (BTC) between March 10 and 20 surprised options traders, as evidenced by the fact that 14% of the $1.12 billion in open interest due April 7 is placed at USD 28,000 or more.
The positive movement in prices can be partly attributed to an increase in demand for commodities, as investors perceive risks in the central bank’s emergency financing programs, as the injection of liquidity causes upward inflationary pressures.
According to Urban Angehrn, CEO of the Swiss Financial Markets Supervisory Authority (FINMA), had Credit Suisse not been bailed out, “many other Swiss banks would probably have faced a run on deposits.” Angehrn added that “there was a high probability that the resolution of a global systemically important bank would have caused contagion effects and jeopardized financial stability in Switzerland and around the world.”
Investor appetite for commodities skyrocketed after the US Treasury Department discussed extending bank deposit insurance from the Federal Deposit Insurance Corporation (FDIC) on March 21. Oil prices as measured by WTI have rallied 23.5% since March 20, and gold topped $2,000 on April 5, its highest daily close since August 2020.
An unexpected shock wave in a $33 trillion asset class previously thought to be a safe haven for inflation could have benefited the commodities sector as well. Morgan Stanley Wealth Management has issued a warning about the commercial real estate market, predicting problems with refinancing.
According to the bank’s report, the sector has been hit hard by the rise of remote work and corporate layoffs, causing vacancy rates to reach their highest level in 20 years. As a result, investment bank strategists predict a 40% drop in commercial real estate prices, saying that “more than 50% of the $2.9 trillion in commercial mortgages will have to be renegotiated in the next 24 months, when new mortgages are likely to interest rates on loans go up between 350 and 450 basis points.
Bitcoin bulls may have benefited from increased demand for inflation protection, but some may have missed the opportunity by placing bets sized at $30,000 or more.
The bulls made 85% more bets, which did not translate into victory
The weekly BTC options expiration has open interest of $1.2 billion, but the actual figure will be lower because bulls have concentrated their bets on Bitcoin price trading above $29,000.
The 1.85 ratio between call and put options reflects the difference in open interest between the USD 720 million of call options (buy) and the USD 390 million of put options. However, the result will be much lower, as the bulls were overly optimistic.
For example, if the Bitcoin price stays near $28,100 on April 7 at 8:00 am UTC, there will only be $125 million in call options. This distinction arises because the right to buy Bitcoin at USD 29,000 or USD 30,000 is nullified if BTC trades below that figure at expiration.
Bulls and bears have similar incentives, so the outcome is unpredictable
Below are the four most likely scenarios based on current price developments. The number of option contracts available on April 7 for buy (call) and sell (put) instruments varies depending on the expiration price. The imbalance that favors each side constitutes the theoretical benefit:
- Between USD 26,000 and USD 27,000: 300 purchase options (calls) vs. 6,000 put options. The net result favors sales instruments in USD 150 million.
- Between USD 27,000 and USD 28,000: 1,200 purchase options (calls) vs. 3,500 sale options (puts). The net result favors sales instruments in USD 60 million.
- Between USD 28,000 and USD 29,000: 4,500 purchase options (calls) vs. 1,100 put options. The bulls turn the tables and win $100 million.
- Between USD 29,000 and USD 30,000: 8,500 purchase options (calls) vs. 100 put options. The bulls’ advantage increases to $240 million.
This estimate only takes into account put options on bearish bets and call options on neutral to bullish trades. Nevertheless, this oversimplification excludes more complex investment strategies. A trader, for example, could have sold a call option, effectively gaining negative exposure to Bitcoin above a specified price, but this effect is difficult to estimate.
The critical level for the weekly expiration is $28,000, but the outcome is impossible to predict due to rising economic downturn risks and market volatility. If the bulls manage to grab $100 million, those funds will most likely be used to further reinforce the support level.
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