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Bitcoin volatility is expected to rise sharply on Friday as 47 percent of options expire

Sep 21, 2020 | News
Bitcoin volatility is expected to rise sharply on Friday as 47 percent of options expire

It also means that the world's first cryptocurrency will be at the point from which can begin both an uptrend and a downtrend.

Open interest on BTC options is just 5 percent less than the all-time high, with just under 50% of them phasing out by September 25, 2020.

The total value of all open options is $ 1.9 billion, which indicates a good market condition, but such a high concentration of transactions and in such a tight time frame isn't a typical situation.

However, the current performance cannot be considered bullish or bearish, as large traders need both decent-sized options and sufficient liquidity to spot trends.

It is also worth to mention that open interest in bitcoins has exceeded the $ 2 billion mark. And this indicator is repeated for the third time. So we can expect that the "bar" will be slightly lower with each calendar month of calculations.

Of course, there is no “magic level” that needs to be maintained in order for Bitcoin to remain stable. However, the analysis of the distribution of indicators by months makes it possible to plan more complex and long-term trading strategies.

Another thing is important - good liquidity in the futures and options markets allows the spot markets to work normally.

At the moment, risk aversion is low

The implied volatility can be analyzed to understand if the premiums are being paid to traders. Each unexpected and significant price change, no matter whether it increases or decreases, will cause a significant increase in this indicator.

It is also known as the "fear index" because it can be used to measure the average premium that traders have to pay for options. Any price fluctuations force market makers to increase these premiums in order to avoid risk.

We can consider this graph as an example:

Bitcoin volatility is expected to rise sharply on Friday

It clearly shows that in mid-March 2020, when the value of BTC fell to a record low of $ 3,637, but then returned to about $ 5,000, volatility increased sharply - to the maximum in the last 2 years.

This situation is the opposite of the current trend - a stable three-month decline in volatility from 76 to 63 percent. Which, however, is not something extraordinary. However, the real reasons for such small option premiums still need accurate analysis.

There is also a very strong correlation between bitcoin prices and US tech stocks. It is difficult to say why this happens, but according to one of the versions, bitcoin traders who focus on the division between cryptocurrency and traditional finance stop their activities.

Actually, here's the graph. Red is bitcoin, blue is the overall US tech sector.

Red is bitcoin, blue is the overall US tech sector

This graph shows that the average correlation over the last 6 months is about 80 percent. And it is not so important what the reasons are - in this correlation can hide the reason of the current decrease in BTC volatility.

It becomes ineffective for traders to bet on the aggressive movement of the bitcoin price, since there is no confidence in the success of this strategy. And in the future, this uncertainty can cause much more serious price fluctuations.

Low volatility may be connected to the new concept of short-term options

Many BTC options are closing on the last Friday of the month, so the shorter ones will receive increased attention due to the need to close call trades.

The strategy is to buy bitcoins on the spot market while selling call options on them.

The covered call is closer to fixed income trades and targets the significant premiums associated with the bitcoin market. But when the term expires, the trader will have to close his positions in the spot, futures and options markets.

The chart clearly shows the current state of activities - when a large number of concluded option contracts expire on Friday, September 25th.

For comparison. This figure is equal to the sum of all active options on Ether (ETH), which expire in September and December.

So far, experts cannot explain such a concentration of BTC options, but a similar picture has already taken shape in June 2020. And it led to a significant decrease in open interest in them - by about $ 900 million.

So far, there are no indicators indicating a weakening of the BTC options market. But if we consider that similar indicators for ETH are 450 million dollars, then any drop in open interest below 1.5 billion is undesirable for bitcoin.

Published on the EXBASE based on materials from cointelegraph.com