Bitcoin options market data shows that investors are starting to position themselves for a temporary withdrawal from the cryptocurrency’s steep bull run.
One-month implied volatility, which is impacted by demand for call and put options, has jumped from around 55% to a four-month high of 70.5% over the past two days, suggesting an increase in expectations of price turbulence in the next four weeks.
The one-month indicator is currently seen at 65%. Implied volatility metrics for longer durations also recovered from recent lows.
At the same time, the negative spread between the cost of puts (bearish bets) and calls (bullish bets) eased, as evidenced by the recovery in one-, three- and six-month put-call skews. Notably, the one-month indicator rebounded from -27% to -14%, according to data source Skew.
These numbers indicate an increase in demand for put options, a sign that investors are protecting themselves from a potential price decline. While call buying can and does cause implied volatility metrics to rise, in this case, the put-call skew has recovered along with the resumption of volatility, suggesting an increase in put demand.
The validation of this evaluation is the tweet of Deribit Insights, which says institutions have bought put options. This does not necessarily imply a bearish bias, but it could be a hedging strategy against a long or bullish position in the spot market.
Options are derivative contracts that give the buyer the right, but not the obligation, to buy or sell the underlying asset at a predetermined price or before a specific date. A call option gives the right to buy and a put option represents the right to sell. Implied volatility, a key component in calculating the price of an option, is the expected standard deviation of returns over a selected period and is expressed in annualized terms.
Fears of a deeper drop in the bitcoin price and demand for puts appear to have been fueled by the volatile price action seen over the past 36 hours. Bitcoin rose as high as $ 18,358 during Asian trading hours on Wednesday only to make a quick retreat to $ 17,200. This has seen volatility increase and the increase in the put-call skew, as traders hedge their bullish sentiment with puts, according to Shaun Fernando, risk and product manager at cryptocurrency exchange Deribit.
The renewed interest in put options comes after bitcoin’s recent vertical rally from $ 10,000 to over $ 18,000. The cryptocurrency has seen multiple corrections of more than 20% in previous bull markets. This time, a bull market correction remained elusive, possibly due to a supply shortfall in the market.
However, according to technical studies, the uptrend may now lose some momentum.
Both the long upper wick attached to Wednesday’s indecisive candle and the reading above 50 on the Relative Strength Index indicate bull fatigue. “The cryptocurrency could experience some selling pressure if prices end (UTC) Thursday below lows near $ 17,100 seen on Wednesday,” Patrick Heusser, a senior cryptocurrency trader at Zurich-based Crypto Broker AG, told CoinDesk.
The broader trend remains constructive with three- and six-month put-call skews reporting negative values and macro factors aligned in favor of scarce assets like bitcoin.
At press time, the cryptocurrency was trading at $ 17,977, according to The CoinDesk 20.