"We have seen two-way flows ahead of the data release, with some clients putting on short-dated put spreads on BTC and ETH for downside protection. At the same time, there has also been buying interest in short-dated call spreads," Dick Lo, the founder and CEO of quant-driven trading firm TDX Strategies, said.
A put option gives the purchaser the right but not the obligation to sell the underlying asset at a predetermined price on or before a specific date. A put buyer is implicitly bearish on the market. A call option gives the right to purchase and the call buyer is bullish on the market.
A bear put spread is created when an equal number of puts are bought and sold simultaneously at different strikes. It's a low-cost, limited-profit bearish strategy, unlike the outright long put strategy where the profit potential is unlimited. Call spreads work the other way around.
The need to add downside protection likely stemmed from fears that an upbeat jobs figure would encourage the already hawkish Federal Reserve to keep interest rates higher for a prolonged time.
The data due at 13:30 UTC is likely to show the world's largest economy added 200,000 jobs in December after November's 263,000 additions, according to Reuters. The unemployment rate is forecast to remain unchanged at 3.7%, while the average hourly earnings growth is expected to have slowed to 5% year-over-year from 5.1%.
The Fed has raised rates by 4.25 percentage points since March, hoping that the aggressive tightening would weigh over the labor market and help control inflation. The jobs market, however, has remained remarkably resilient, with monthly increases averaging well above 200,000 since September.
Therefore, the headline figure needs to be well below estimates to avoid an adverse reaction in risky assets, including cryptocurrencies.
"We would need to see a number sub-200k to suggest a sufficient easing of labor market conditions, which could then fuel a risk-on rally. A number in line with expectations likely results in muted to mildly negative price action," Lo told CoinDesk.
A risk-on rally would bode well for traders who have taken call spreads, perhaps expecting that the data would weaken the case for continued Fed tightening.
Some traders have been snapping up bullish volatility trades like long strangles on Deribit, the world's largest crypto options trading exchange by open interest and volume.
Strangle involves buying bullish calls and bearish puts with the same expiry at strikes equidistant from the underlying asset's current market price. The strategy makes money as long as the underlying asset charts a big move in either direction.
Hence, traders typically buy strangles ahead of volatility-boosting binary events like the release of the jobs report, Federal Reserve meetings and election results.
"Investors appear to be betting on a significant price move post-NFP," Griffin Ardern, volatility trader from crypto asset management firm Blofin, said, referring to nonfarm payrolls.
Options trading is a risky business. While strangles look simple, they aren't without risks. A strangle buyer can lose the entire amount paid as compensation to call and put seller if the market stays flat.
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