The June contract on the CME Bitcoin derivatives are expiring this Friday. So let’s review the positions in the futures and the options market leading up to the last trading day.
Looking at the Futures is a weekly newsletter where we are making sense of the Bitcoin derivatives market. Emphasis is put on the CME products as they dominate the field for institutional investors. But we’ll occasionally look at other venues too.
Subscribe now and don’t miss anything!
First thing first, where is Bitcoin? As we have discussed last week Bitcoin is going nowhere these days. The price range between $8,700 and $10,000 is holding for almost two months now.
We had a massive rally from the crash of March to the beginning of May and then nothing. Since then I has just been a game on waiting for the return of volatility.
And when you look at the trading activity on the CME futures you can see that since the peak we have been on a slow decline in open interest. That’s a sign the bulls are slowly losing patience when BTC is failing repeatedly to break $10,000.
The same is true for the daily traded volume which on average is moving back down.
The rollover of the June positions is a bit late compared to the previous months. I’d guess this is a result of the lower level of trading activity in the market.
But it isn’t on the futures that the volatility play is most obvious. Nope, you just have to look at the latest positions on the CME Bitcoin options to have a great picture of what the traders are waiting for.
You can basically see the trading range of Bitcoin over the last month by looking at the gap in the distribution of puts and calls.
Where are the bull call spreads starting? At $10,500 which is basically the top of the range.
Where are the bear put spreads starting? At $8,700 which is the bottom of the trading range.
So there you have it, on the options market both the bulls and the bears need one thing to start getting some payoff: volatility. And this is the only thing that Bitcoin is lacking these days…
There is this general idea that when a market is trading in a range for a long time and at the same time volatility is coming down then it is a sign of a big incoming move.
That’s been the trade on the CME options market for a while now. And as of yesterday again more calls are added to the stack. The total calls stand at more than 40,000 Bitcoin equivalents in futures contracts. We are back down to 8 calls for 1 put where it was up to 57 calls for 1 put until very recently.
Let’s break down what is going on month by month.
On the June contract (note that this distribution chart is in number of contracts):
This is the front month expiring in two days so most of the action is there.
28,570 BTC worth of calls.
4,910 BTC worth of puts.
Bitcoin needs to make a minimum of 15% move up or down for anyone to cash in any significant amount of money.
On the July contract (note that this distribution chart is in number of contracts):
11,760 BTC worth of calls.
315 BTC worth of puts.
Less positions than in June for now but the strategy is the same.
Mostly bull calls targeting a break out of Bitcoin above $11,000.
Not everybody lost hope on that happening soon enough.
On the August contract (note that this distribution chart is in number of contracts):
925 BTC worth of calls.
100 BTC worth of puts.
But again the same trade as in June and July.
So after all those June spreads most likely all expire worthless it will be interesting to see if we continue breaking new records in open interest on the CME Bitcoin options.
Will we see more call spreads? Will we see new strategies? Or is the lack of volatility just going to lead to a decrease in open interest? It could go any direction at this point.
Let’s conclude this week’s review by a quick look at the commitment of traders report dated June 16. So what’s the situation:
The smart money is still net short around the same level as last week.
But retail investors are sharply moving off their record high net longs.
Hedgers of course are there to balance it all.
The decline in net long positions for retail investors is of course the interesting part. Historically retails has always been the most bullish category. So seeing they are the one reducing their long exposure significantly without Bitcoin dropping out of the current trading range is telling.
To me this is a sign that more and more people are giving up on the continuation of the bullish move. And this is exactly the setup needed for a big move to happen!
So let’s see how that plays out…
If you liked this article please share and subscribe to help the Ecoinometrics newsletter grow!