Strategies that involve taking advantage of the post-data volatility explosion saw uneven volumes in the Bitcoin (BTC) and Ether (ETH) options market ahead of the important U.S. nonfarm payrolls (NFP) report.
Ahead of the data release, traders are observing two-way flows, with some clients securing downside protection by purchasing short-dated put spreads on BTC and ETH, fearing that a positive payrolls figure would encourage the already hawkish Federal Reserve (Fed) to maintain higher interest rates for an extended period led to the necessity to provide downside protection. Short-dated call spreads have also seen buying interest at the same time.
The buyer of a put option has the option, but not the obligation, to sell the underlying asset at a defined price on or before a given date. Buying a put indicates implied market bearishness. The buyer of a call option, who has confidence in the market, has the choice to buy.
A bear put spread is produced when an equal number of puts are simultaneously purchased and sold at various strikes. In contrast to the outright long put strategy, which has unlimited profit potential, it is a low-cost, bearish method. The reverse is true for call spreads.
According to a reputed news publishing house, the report, due at 13:00 UTC, is expected to indicate that the world’s largest economy added 200,000 jobs in December after adding 263,000 in November. The average hourly wage growth is anticipated to have slowed to 5% from 5.1% year over year, while the unemployment rate is predicted to remain constant at 3.7%. The headline NFP result must print far below projections in order to prevent a negative reaction in risk assets, including cryptocurrency, .
Since March 2022, the Fed has increased rates by 425 basis points 4.25% in 2022, in the hopes that the drastic tightening will weigh on the labor market and aid in the reducing record-breaking inflation. . Payrolls have averaged over 200,000 since September, yet the labor market has been impressively robust.
Investors should wait till the number drops below 200k before assuming the labor market has loosened enough to support a risk-on rise. Instead, expected outcomes lead to subdued to mildly negative price action.
Some traders have been buying bullish volatility trades like long strangles on Deribit, the biggest crypto options trading platform by open interest and volumes. A Strangle is buying bullish calls and bearish options with the same expiration at strikes that are distributed uniformly from the current market price of the underlying asset to execute. The approach is profitable as long as the underlying asset makes a significant move in either direction. As a result, traders frequently purchase strangles before binary events like these that increase volatility.
A risk-on surge would be advantageous for such traders who purchased call spreads, hoping that the data would undermine the case for further Fed tightening.