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Many illogical events in the markets make sense when viewed through the lens of options trading. The March events that took place in the US and European economies can be safely described as a conspiracy theory or a managed crisis, if you look at them through option analysis.
Options are a more complex instrument that is significantly undervalued by traders and investors in all markets. As a rule, options are traded by Smart-money (large participants), which have greater opportunities in terms of analytics, access to information and influence on the agenda.
The Fed rate and the US bond market
On March 7 and 8, the head of the Fed made statements that the Fed would be pursuing a tougher policy than expected. In particular, Jerome Powell said that his office will raise the rate higher than the market expects, and keep it at a high level longer than the market expects.
After such statements, it was expected that the market would begin to set higher rates on US bonds by selling them. The higher the rate, the cheaper the bonds. The market (retail or individual traders) did just that, with record volumes of US bond shorts.
During the days of the speech of the head of the Fed, the chart of 10-year US bonds looked like this:
Since the beginning of February, as Powell spoke about the seriousness of the Fed’s intentions to fight inflation, the cost of bonds gradually fell, while their yields grew.
But in reality, everything happened quite the opposite. As a result, retail investors in US bonds suffered an unprecedented collapse.
There was a paradox – the head of the Fed announced an increase in rates, and bond yields began to decline sharply.
It should be remembered that just at the beginning of March, publications about the problems of Silvergate Bank began to appear in the media.
Option analysis: conspiracy theory or managed crisis
On March 8, record-breaking portfolios are formed on the 10-year bond index options market, aimed at growth with strikes 111.5, 112, 113.5, 114 and 115.
Let me remind you that earlier we announced that the 10-year index was on March 8 at a level below 111 points and the majority’s expectations were that it would fall. In fact, it has already risen to 116 points, bringing huge profits to call option buyers who acted against market logic and against the market.
Since March 10, there has been news about the problems of Silicon Valley Bank, which became a harbinger of a banking crisis in the US and Europe. The market in a panic begins to withdraw from bank shares and invest in bonds, their value is growing, and the yield is falling.
Holders of option portfolios earn money.
This begs the question: how did the option buyers know that rates would start to fall sharply after Powell’s tough speech, and not rise, as it would be quite logical.
This is one example of how option analysis can reveal such market inconsistencies, which are commonly called conspiracy theory or managed crisis.
Let’s look at the chronology of events again:
March 7-8 Powell nightmares markets by promising tighter monetary policy that will lead to more aggressive raising rates
On March 8, Smart-money (large players) collect record portfolios in terms of volume, aimed at increasing the index of 10-year US bonds (which is equivalent to betting on downgrade their returns and the Fed rate).
On March 10, publications appear in the media about the problems of the Silicon Valley Bank, which develop into a systemic crisis in the US banking sector.
The banking crisis is inflated for 1.5 weeks, the index of 10-year bonds is rising, bringing fabulous profits to buyers of call options.
So what is it, if not a conspiracy theory or a controlled crisis that allowed option analysis to be revealed?
#conspiracy #theory #managed #crisis