As Bitcoin’s price hovers in the mid-$24,000 range, market participants take a breather after a tumultuous week of price fluctuations. Last week, Bitcoin dipped below $22,000 for the first time in over three weeks, weighed down by falling US stocks due to concerns about the Federal Reserve’s tightening policies. A series of high-profile US bank collapses, including Silvergate, SVB, and Signature Bank, further exacerbated the situation, driving Bitcoin’s price as low as the $19,500s. However, proactive measures from US authorities and narratives about Bitcoin being a safe haven against traditional financial system turmoil helped propel the cryptocurrency to a peak of the mid-$26,500s by Tuesday. With such wild price swings in a short span of time, Bitcoin volatility remains a key concern for traders, prompting a closer look at Bitcoin options markets for potential insights.
Increased Bitcoin Volatility Bets from Traders
Deribit’s Bitcoin Volatility Index (DVOL) experienced a significant increase over the last week, jumping from around 50 to nearly hitting a two-month high of around 62. Although this level is still below the highs of 73 seen in January and last year’s post-FTX collapse highs of 114, it indicates that investors are positioning themselves for choppier waters ahead. This anticipation makes sense considering the key $25,200-400 resistance area that Bitcoin breached this week, which could potentially pave the way for a swift rally towards the next major resistance area around $28,000, and possibly even above $30,000.
In addition to the DVOL, implied volatility according to At-The-Money (ATM) Bitcoin option pricing has also been on the rise. ATM Implied Volatility for options expiring in 7-days reached its highest level since mid-January on Tuesday at 67.44%, up from earlier monthly lows in the 42% range. Options expiring in 30, 90, and 180 days have all seen their ATM Implied Volatility rise to multi-week highs as well.
Traders Adopt a Neutral Stance on Bitcoin Price Outlook
Last week, when Bitcoin fell below $20,000 for the first time in two months, the 25% delta skew of Bitcoin options expiring in 7, 30, 60, 90, and 180 days reached their lowest levels of the year, ranging between -5 to -10. The 25% delta options skew serves as a popular proxy for the degree to which trading desks overcharge or undercharge for upside or downside protection via put and call options sold to investors.
A 25% delta options skew above 0 indicates that desks charge more for equivalent call options compared to puts, implying stronger demand for calls versus puts. This can be interpreted as a bullish sign, as investors are keener to secure protection against (or bet on) a rise in prices.
However, following Bitcoin’s recovery to nine-month highs, options markets have shifted towards a broadly neutral view on the market. The 25% delta skew of Bitcoin options expiring in 7, 30, 60, 90, and 180 days has returned close to 0.
Interestingly, the ratio between put and call options on Deribit sends a more bearish signal. The open interest ratio of Bitcoin put and call options reached 0.54 on Wednesday, its highest level of the year, and up from recent record lows below 0.40. A ratio below 1 signifies that investors favor owning call options (bets on price increases) over put options
(bets on price decreases), while a ratio above 1 indicates the opposite. The current ratio suggests that traders are more inclined towards bearish bets, perhaps due to concerns about a potential correction or a lack of catalysts to push Bitcoin higher.
Bitcoin’s volatility remains a key concern for traders, as the cryptocurrency experiences wild price swings in short periods of time. The recent increase in Bitcoin’s implied volatility and the DVOL index suggests that investors are positioning themselves for choppier waters ahead, while the neutral stance of the 25% delta skew indicates that options markets are currently undecided on the market’s direction. However, the rising put-call ratio on Deribit implies that traders are leaning towards bearish bets in the short term. As always, traders should exercise caution and keep an eye on the various indicators to stay ahead of market movements.