Bloomberg: What does it mean that traders are betting on call options after the 805 plunge?

Author: David Pan, Bloomberg; Compiler: Wuzhu, Golden Finance

Cryptocurrency traders almost immediately jumped back into bullish bets in the options market after the worst liquidation of long positions this year over the weekend.

Offshore exchanges and U.S. over-the-counter traders are buying call options, giving them the chance to buy Bitcoin at $90,000 or even higher later this year, according to market participants.

About $1.1 billion in cryptocurrency bets were liquidated on Aug. 4, one of the biggest sell-offs this year, according to Coinglass. In a plunge that began during Asian trading hours, Bitcoin plunged 17% and Ethereum lost more than a fifth of its value at one point. By Tuesday, both were up. About 50% of open interest in cryptocurrency derivatives was liquidated during the plunge, said Yevgeniy Feldman of SwapGlobal, which provides prime brokerage and swaps services to institutional investors.

“People were getting liquidated en masse on long positions, it was horrible,” Feldman said. “But U.S. hedge funds and institutional players trading options through over-the-counter desks on Monday and Tuesday resumed bullish call option bets by buying Solana and bitcoin call spreads.”

Source: Deribit

Feldman said one of the main factors driving the rebound in Bitcoin prices was a surge in demand for Bitcoin from Coinbase Global Inc. The total amount of commitments to buy Bitcoin far outweighs the total amount of commitments seeking to sell, as shown by the bid-ask ratio, according to exchange order book data collated by SwapGlobal.

"This imbalance suggests that there are a lot of buyers waiting for prices at $49,000 and below," Feldman said. Bitcoin fell to a low of $49,212 on Monday, its lowest level since February.

Short-term hedging lows have increased rapidly on offshore exchanges over the past few days. Deribit's put-to-call ratio remains high, with more puts bought than calls in the past 24 hours. Feldman said put buying on exchanges tends to be more pronounced because retail investors using such platforms tend to trade in and out of the crypto asset class, while U.S. institutions that hold large amounts of Bitcoin and use over-the-counter desks hedge options more.

“While the bias at the front end of the curve was heavily weighted toward puts, post-(U.S. presidential) election, even after the sharp sell-off, the bias remained weighted toward calls,” said Ravi Doshi, head of markets at prime broker FalconX. “As has been the case for much of this year, traders continue to expect a bullish second half for bitcoin.”

As of today, the September $90,000 call, the December $100,000 call and the March $100,000 call were the largest open interest contracts on the listed market, with just those three options accounting for nearly $1 billion in notional value, Doshi said. Bitcoin prices rose about 4.5% to $56,850 in New York on Tuesday.

The bullish outlook for cryptocurrencies at the end of the year is partly due to the rising likelihood of Donald Trump’s re-election as U.S. president, who has become a supporter of cryptocurrencies.