Pionex Trading Desk 3/20/2023

Events

3/22/2023

• FOMC rate decision + Interest rate projections 2:00
• Powell press conference 2:30

3/23/2023

• Initial jobless claims 8:30 
• New home sales 10:00

3/24/2030

• Durable goods orders 8:30
• Fed Member Bullard speaks 9:30
• services PMI (This has been a strong factor of inflation) 9:45

Fundamentals

FOMC meeting at 2 PM EST today, and Powell will make comments at 2:30 PM EST. The market has priced in an 85% chance of a 25 bp rate hike for this meeting, and our views are in line with the market expectation. We are really focused on Powell’s press conference, where he should be giving updates on the recent regional bank failures and the effects on how the Fed will proceed with rate hikes. We don’t believe he will specifically say they will pause rate hikes due to how ambiguous they have always been during press conferences. But we expect this is the likely path going forward. If Powell is clearer and talks about pausing rate hikes, we see a high probability of a run in $SPY towards $410 – $415 and BTC towards $34,000 – $36,000. In most of the six instances since 1970 when the Fed paused hikes for at least three months after going on a cycle of rate hikes, there was a recovery in US stocks, with SPY returning 8.2% on average in those periods, according to Bloomberg Intelligence. So if we get a rate hike pause this time around, our view is a continuation of the current rally in the mid-term. 

Option Data

We have elevated IV levels due to the FOMC, which means higher returns on our options trades! On the ±25 Delta (1-3 day) BTC options, there is a +9% IV skew to the call side, meaning more traders are positioned long and have upside expectations for BTC price. ETH ±25 Delta (1-3 day) options have a +3% IV skew to the upside.

We see an even spread between calls/puts for options expiring tomorrow. The ratio of OI(Open Interest) between calls and puts is 0.86 representing a slightly higher number of puts. This can be explained by traders buying puts to hedge their long positions or trying to capture a quick spike down with the rate decision. On the other hand, with Options expiring next week, 3/31, we see a high concentration of calls at $32,000 and above with a ratio of 1.51 between calls and puts OI. This shows that traders are still net bullish in the next two weeks. 

Technicals

Looking at short accumulated positioning, we see a large group of shorts at $29,000 – $31,000. So if prices get much above $29,000, shorts will start feeling the pressure and cause a short liquidation and pushing prices up. On the flip side, we see a lack of highly leveraged positioning on the long side and a lack of positions near current prices which reflects how quick this current rally has been and how offside many traders are. We expect prices between $25,000 to $27,000 to offer good support as buyers try to dip buy to be positioned for a continuation. 

Trades

Due to the higher volatility and having consolidated for 4 days, a direction will be determined soon. The data from the options market is slightly bullish, but all will depend on Powell’s press conference at 2:30 PM today. 

So in anticipation, we took a small position in selling 2-day expiry far OTM $33,000k calls and selling 2-day expiry $25,500 puts, returning 17% and 26%, respectively. We are more comfortable taking a bit more risk on the downside because $25,000 will offer strong support, so that level will not be broken easily. 

After Powell’s press conference, I will also be taking a long trade if we get a break out of $29,000. The reasoning behind this is the amount of shorts gathered on that level. If we continue up, there will be a melt-up in shorts covering which can result in quick profits.