Bitcoin Options Traders, Burned by Last Month’s CPI Report, Now Seek Downside Protection

Bitcoin (BTC) traders have turned cautious ahead of an impending U.S. inflation report, after being burnt the last time by positioning for a post-report bullish move.

The Labor Department on Thursday is likely to report that the core consumer price index (CPI), which strips out volatile food and energy prices from the overall data, accelerated to a year-on-year rate of 6.5% in September from August’s 6.3%. The headline figure is seen slowing a touch to an annual 8.1% from 8.3%, according to Reuters.

The core CPI is considered a better indicator of underlying inflation. So, an expected uptick would back the case for continued rapid-fire Federal Reserve (Fed) rate hikes that have wrecked risk assets, including cryptocurrencies, this year.

Investors seem worried about the possibility of the CPI injecting renewed downside volatility in bitcoin. The seven-day call-put skew, which measures the cost of calls relative to puts, has dropped from -5% to -10% in recent days. In other words, bitcoin puts, or derivative contracts offering downside protection, are becoming more expensive than calls, or bullish insurance, a sign of investors adding downside protection ahead of the CPI.

“We have seen large buying in October expiry bitcoin puts at $17,500 and $18,500 strikes ahead of the CPI,” Shiliang Tang, chief investment officer at crypto hedge fund Ledger Prime, said.

The recent decline in the short-duration call-put skew is in stark contrast from the trend seen a month ago when the metric crossed above zero, suggesting a bias for calls. Traders snapped up bullish bets back then, perhaps hoping that the inflation data (released on Sept. 13) would show price pressures cooled in August, cementing the case for the Federal Reserve (Fed) to pivot away from the liquidity tightening that has wrecked risk assets this year.

However, the inflation figure came in higher than expected, dashing the Fed pivot hopes and trapping call buyers on the wrong side of the market. Bitcoin fell by nearly 10% on the same day, with the skew falling below zero in favor of puts.

“Last month, ahead of the inflation data, traders bid weekly calls, pushing the seven-day call-put skew above the positive territory. However, that trade was a huge loser. As such, traders are staying away from such bets this time,” Gregoire Magadini, CEO of options analytics platform Genesis Volatility, told CoinDesk.

The preference for puts is also evident from the put-call volume ratio, which has doubled since Friday.

Some traders are buying “gamma” in anticipation of a big move after the CPI print, according to Singapore-based crypto options trading giant QCP Capital.

Buying gamma, or being long gamma, means purchasing a call, put, or both. The long gamma positions make money when the underlying asset, such as BTC in this case, charts a big move in either direction and bleed money if the underlying remains dull.

“In the crypto vol space, we are seeing heavy demand for front-end [short duration options], as the market is buying up gamma ahead of Thursday’s print,” Singapore-based options trading giant QCP Capital said in its Telegram-based channel.