MicroStrategy Options Hedge Risk of 96% Drop After Bitcoin Rout

May 11, 2022

Observations & Insight

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Lead Stories

MicroStrategy Options Hedge Risk of 96% Drop After Bitcoin Rout; With stock around $230, put options target a drop to $10; Company has served as a proxy for bets on cryptocurrency
Joanna Ossinger – Bloomberg
Few companies are tethered as closely to Bitcoin as MicroStrategy Inc., a software company that’s plowed its profits and borrowed money into the cryptocurrency. Shares of the Tysons Corner, Virginia-based company have tumbled alongside Bitcoin, dropping more than 50% since the end of March to around $230. Yet options activity shows some investors are eager to protect against — or bet on — an even deeper hit. Some of the most active options traded Tuesday were puts with January expirations that give the owner the right to sell the stock at $40, $20 and even $10. There had been no open interest in those contracts before.

Whither Options Trading?
Terry Flanagan – Traders Magazine
Will the exit of the scarred retail trader crater options trading?
That seems to be the conventional wisdom, but ongoing strength in the institutional sector can at least partly offset that, and rapid technology innovation may keep retail resilient after all.
Those were some of the crosscurrents discussed Tuesday at the “State of the Industry” panel at the Options Industry Conference in San Antonio.

Institutions Boost Options Trading – Slowly
Traders Magazine
Hedge funds, mutual funds and other Institutional buyers and sellers of options continue to trade more, and there is pent-up demand for further gains if the industry can make block trading more efficient and anonymous.
That was a key takeaway from the Wednesday morning “Institutional Perspectives on Today’s Options Markets” panel at the Options Industry Conference (OIC) in San Antonio.

Ukraine war reveals ‘black swan’ danger
Jeremy Grant – Financial Times
Financial institutions have been grappling with conflict-related sanctions and resultant risks for decades, including those that emerged in the wake of the 2001 terrorist attacks on the US and Moscow’s annexation of Crimea in 2014.
Yet the economic restrictions that the US, acting with the G7 and the EU, has rolled out in response to Russia’s invasion of Ukraine are unprecedented in scale and scope. They represent “a new kind of economic statecraft with the power to inflict damage that rivals military might”, as US president Joe Biden put it, in a recent speech in Warsaw.

Morgan Stanley’s Bearish Wilson Sees More Gloom for Stocks
Sagarika Jaisinghani – Bloomberg
The rout in stocks isn’t over just yet, according to Morgan Stanley strategists, who see scope for both US and European equities to correct further amid mounting concerns of slowing growth.
Strategist Michael Wilson, who has long been a skeptic of the decade-long bull run in US stocks, said in a note that even after five weeks of declines, the S&P 500 is still mispriced for the current environment of the Federal Reserve tightening policy into slowing growth.

The stock market will fall another 25% if job growth slows and an economic recession materializes, DataTrek says
Matthew Fox – Business Insider
The stock market could fall another 25% if interest rate hikes from the Federal Reserve spark an economic recession, according to DataTrek Research.
The Fed has a tough balancing act as it attempts to tame rising inflation without sending the economy into a downward spiral. One way the Fed can achieve its goal of a soft landing is by convincing corporate America to slow its hiring frenzy, DataTrek co-founder Nicholas Colas said.

Yellen points to hedge funds, unregulated cryptocurrency as sources of instability
Tobias Burns – The Hill
Treasury Secretary Janet Yellen took heat from both Republican and Democratic lawmakers Tuesday as she told them that “the inflation outlook still remains quite uncertain.”
Yellen delivered a report to the Senate Banking Committee from the Financial Stability Oversight Council (FSOC), which was set up in the wake of the subprime mortgage crisis to make sure market crashes and government bailouts on that scale would never be needed again.

Here are 4 reasons why market volatility is unlikely to subside soon, even after U.S. inflation rate slows to 8.3%
Vivien Lou Chen – MarketWatch
The list of reasons why the financial market’s wild swings can keep going and even worsen is growing by the day — starting with the fact that investors aren’t yet pricing in worst-case scenarios for inflation and the U.S. economy.
Though Wednesday’s consumer-price index report showed the annual headline U.S. inflation rate slowing to 8.3% in April, the data doesn’t entirely settle the question of where inflation is likely go from here. What’s more, stock-market investors have yet to price in a recession, with DataTrek co-founder Nick Colas saying that the S&P 500 would have to fall to 3,525 from its current level just above 4,000 in order to reflect 50:50 odds of a U.S. downturn.

Goldman Sachs Touts Japanese Yen As “Ideal Hedge” Against Inflation
Zahra Tayeb – Business Insider
Goldman Sachs believes the Japanese yen is an ideal hedge against the risk of a US
Recession, which the investment bank believes is a possiblity in the coming two years.
In a research note published on Tuesday, Goldman analysts, led by Karen Reichgott Fishman, noted that the yen is trading at “extremely cheap levels” and is undervalued aga ins the dollar to the tune of 20-25%.

Coinbase trading volumes plummet as ‘crypto winter’ sets in
Hannah Murphy – Financial Times
Coinbase’s trading volumes fell more than 40 per cent in the first quarter, as worse than expected earnings and a bleak outlook underscored the fallout from the crypto bear market.
Shares in the largest US cryptocurrency exchange dropped more than 15 per cent in after-hours trading after the company reported net losses of $430mn, far greater than the $47mn expected by Wall Street analysts.

Regulation & Enforcement

Archegos Spurs CFTC Boss’s Vow to Scrutinize Family Offices
Lydia Beyoud and Tom Schoenberg – Bloomberg
The top U.S. derivatives regulator is ratcheting up scrutiny of family offices after last year’s blow up of Archegos Capital Management exposed significant blind spots in the swaps market. Commodity Futures Trading Commission Chairman Rostin Behnam said Monday that the collapse of Bill Hwang’s firm shows a need to rethink some of the agency’s rules. The episode also underscored the danger of one investor building up a massive swaps position while leaving regulators unaware, he added.

Wall Street watchdog to ramp up scrutiny of risky derivative products
Katanga Johnson – Reuters
The chair of the U.S. Securities and Exchange Commission warned on Wednesday that the agency may bring more enforcement actions in cases involving risky derivatives, saying such products can create “system-wide risks” during times of market stress.

SEC Examining Complex ETF Products Popular in Market Downturns
Lydia Beyoud – Bloomberg
The US Securities and Exchange Commission is ratcheting up its scrutiny of investment firms using leveraged and inverse exchange-traded funds to hedge against market volatility.
The products “can pose risks even to sophisticated investors, and can potentially create system-wide risks by operating in unanticipated ways when markets experience volatility or stress conditions,” Chair Gary Gensler said Wednesday in remarks at an industry event.


Comprehensive technology overhaul for the world’s largest equity derivatives clearing house
In 2019, the Options Clearing Corporation (OCC) launched its Renaissance Initiative to completely replace the technology for its risk management, clearing and data systems. The world’s largest equity derivatives clearing organisation has already begun to see the benefits of this work, reflected in it recently being named Clearing house of the year in the Risk Awards 2022.
In this podcast, Zoi Fletcher speaks to Scot Warren, chief operating officer at OCC, about the advances brought about by this technology overhaul.


Where Does Today’s Grain Market Volatility Stand Historically?
Emily Balsamo and Steven Stasys – TheStreet
Corn, wheat, and soybean implied volatility and CVOLTM have been high in recent weeks relative to recent years. Implied volatility for some grains and oilseed contracts was even higher, however, during parts of the commodity boom of the early 21st century. How do the supply and demand fundamentals of 2008 compare to 2022, and what can we learn from the past to inform our expectations for the future?


A Guide to Reading an Option Chain
Paul Kim – Business Insider
An option is a contract that gives you the right — but not the obligation — to buy or sell 100 shares of a stock at a predetermined price, known as a strike price, regardless of the stock’s price when you exercise the contract. That right gives the contract value, which can be traded as its own type of security.
If you decide to trade options, the first hurdle that you’ll encounter is reading an option chain, a table that shows you all the relevant information — and it’s a lot of information — you need to make investment decisions. This wall of numbers can be overwhelming, and it can be hard to know where to start. Here’s a guide on what all the terms mean and what to look out for in an option chain.

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