Monthly market wrap-up: Leverage bonanza – Be careful

Leverage is ballooning, while volatility is flattening. All in all, this is a situation that could generate explosive volatility and benefit sophisticated options traders. My long-term view remains unchanged, now is a good time to build exposure.

Short term

Leverage is going full-on parabolic in the crypto derivatives market, as BTC remains in a very directionless state. Meanwhile, funding rates prevail in neutral to below-neutral terrain while futures trade in backwardation. If I were instructed to write a cookbook recipe for a short squeeze, I would add all current ingredients, but I’d love to sprinkle it with more potent signals from the short-term funding rates. As of now, the activity in perps in the last few weeks, unfortunately, indicates a concerningly balanced view between longs and shorts. Thus, while I view the current open interest as well blown above any levels that may be assessed as sustainable, opaqueness from market signals restricts me from having any directional view on the winddown of said leverage.

Short term, I would avoid adding risk through leverage in the market, as the current setup is ripe to reap havoc in either direction. However, declining IVs in options and an overwhelmingly flat market represent an opportunity for straddle strategies to position for potential bursts in volatility. If you are unfamiliar with straddles, you should refrain from trading options. Still, you’d consider a short-term position in FTX’s BVOL perp this week as various macro events may introduce new clips of volatility to the market as we anxiously await Thursday’s CPI release. Heck, even the Wednesday release of FOMC minutes or PPI may be sufficient to make the old orange coin move.

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