Bitcoin drops below $54K, stocks sell-off after new Covid variant emerges
Bears took control of BTC price after options markets flashed bearish signals, but should traders be worried?
Deribit exchange is the absolute leader in the Bitcoin (BTC) options markets and on Nov. 24 the 25% delta skew indicator signaled that sentiment among pro traders was becoming “more bearish overall.”
Bitcoin price appears to following a descending channel since Nov. 9, so a “bearish” signal might be a reflection of the 22% drop since the $69,000 all-time high.
The 25% delta skew compares call (buy) and put (sell) options side-by-side. It will turn positive when the protective put options premium is higher than similar risk call options, thus indicating bearish sentiment.
The opposite holds when market makers are leaning bullish, and this causes the 25% delta skew indicator to enter the negative range.
Readings between negative 8% and positive 8% are usually deemed neutral, so Deribit’s analysis is correct when it states that a considerable shift towards “fear” happened on Nov. 23. However, that movement eased on Nov. 26 as the indicator now stands at 8%, no longer supporting traders’ bearish stance.
What happened in the futures markets?
To confirm whether this movement was specific to that instrument, one should also analyze futures markets.
The futures premium — also known as the “basis rate” — measures the difference between longer-term futures contracts and the current spot market levels. A 5% to 15% annualized premium is expected in healthy markets, which is a situation known as contango.
This price gap is caused by sellers demanding more money to withhold settlement longer, and a red alert emerges whenever this indicator fades or turns negative, known as “backwardation.”
Unlike the options 25% delta skew, which has shifted to “fear”, the futures’ primary risk metric was relatively stable at 11% between Nov. 16 and Nov. 25. Despite a minor drop, its current 9% is neutral for futures markets and not even close to a bearish tone.
Traders are mostly using call options
One can only make guesses on why pro traders and market makers using Bitcoin options markets are overcharging for put (sell) options. Maybe they fear imminent risk after a U.S. Senate Committee sought information on stablecoin issuing on Nov. 23.
On that same Tuesday, the Board of Governors of the Federal Reserve System announced work on a series of “policy sprints” aimed at addressing regulatory clarity in the crypto industry. The administrative agencies will potentially adjust compliance and enforcement standards on existing laws and regulations.
Still, that does not explain why these uncertainties were not reflected on Bitcoin futures markets. So one must question whether the 25% skew indicator should be disregarded in that case.
The Dec. 31 Bitcoin options expiry holds 60% of the current open interest, totaling a $13.4 billion aggregate exposure. As the above chart shows, there’s virtually no interest on put (sell) options above $60,000.
Considering call (buy) options are 145% larger than the protective puts for Dec. 31, one should not worry too much on how market makers are pricing these instruments. Thus, the 25% delta skew shouldn’t hold much importance right now despite Deribit’s bearish alert.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.