Lost Momentum

Beware a changing tide.

This was the advice I shared in early February.

At the time, Bitcoin began to catch momentum on its move towards $50,000.

This move indicated  we were entering into a new high volatility regime. It was a relief given the compression in volatility following the time period after the Bitcoin ETF began to trade in January. This  momentum I refer to led to an incredible 6-week rally to new all-time highs.

You can see where I made mention of it here.

But as we know, markets are seldom ever static, the tides are constantly shifting. And over the past week it seems we’ve witnessed another trend change. This time with options buyers. In particular those long calls getting burned for the first time since January. 

As we see below, this culminated in nearly every open call (green bars) for this past week’s March 22nd expired worthless as price drifted back to the low $60,000 region.

You might remember us pointing out a couple of weeks back, that any time contract pricing becomes as steep as it was in early March the risk - reward flips in favor of volatility sellers. 

This is because the momentum of spot ETF inflows and multiple gamma squeezes that it took to drive up premiums in recent weeks is difficult to sustain over long periods of time. Eventually the market always levels out and resets to its new equilibrium. 

With this week’s expiration now behind us we once again turn our focus to the quarterly expiry we spoke about last week. 

And as we see below, the majority of these long call positions (green bars) still remain open despite prices correcting over the past week. 

This is worrisome as the market has clearly lost momentum, yet these large positions are yet to take profit and roll their exposure to later dated contracts.

This suggests to me that the majority of open long call interest on the quarterly expiries is owed to hedging - people who have de-risked their spot exposure in order to buyback lower, while keeping the open calls as a hedge against further upside in the near term. 

With dealers still being short those out of the money calls, and the ETF momentum dissipating over the past week, it’s difficult to see a scenario where we head back towards the $70,000 region into the monthly close.

Turning our attention to recent order flow for more clues we see that over 2,000 notional BTC worth of puts (red block rising, yellow line dropping) expiring next Friday, March 29th were purchased following last night’s options expiration.

That’s not a great sign.

It signals that the market is bracing itself for further downside into the end of the first quarter. 

Based on the current positioning of the options market, and barring unforeseen catalysts in the week to come, we should assume that price will continue to consolidate, if not drift towards the mid-$50,000 region in the weeks to come. 

If so, this decrease in upside volatility should lead to lower call premiums which will present some excellent entry opportunities on out-of-the-money calls expiring later in 2024 for those who missed the first run up to new all-time highs. 

Once we see those opportunities arise we’ll be sure to let you know….

Until then trade safe and mind the changing tide.

Watching the tape,

J.J.