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Bullish Bitcoin Bets Rise as Implied Volatility Slides
Some traders bought bitcoin calls at strikes $45,000 and $46,000 during Thursday's U.S. trading hours, according to over-the-counter institutional cryptocurrency trading network Paradigm.
Updated Mar 8, 2024, 8:14 p.m. Published Jan 19, 2024, 1:07 p.m.
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Bitcoin [BTC] options now look cheap and some traders are taking advantage of the same to raise bullish bets.
Options are derivative contracts that give the purchaser the right to buy or sell the underlying asset at a predetermined price at a later date. A call gives the right to buy and allows traders to profit from or hedge against price rallies, whereas a put option does the opposite.
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Traders consider options cheap when implied volatility, one of the key determinants of options prices, slides below its long-term average or under the asset’s realized volatility. Implied volatility is the one standard deviation range of the expected movement of the underlying asset’s price over a year and tends to be mean-reverting. Realized volatility is the price movement that has already happened.
Bitcoin’s implied volatility (IV) peaked with the launch of spot ETFs in the U.S. last week and has dropped below the realized volatility, stoking demand for calls at strikes $45,000 and $46,000 during Thursday’s North American trading hours, according to over-the-counter institutional cryptocurrency trading network Paradigm.
“We saw a large buyer of Feb $44k straddles and some outright call buying in the $45k /$46k strikes,” Paradigm said in a Telegram broadcast. “BTC implied [volatility] now trades well under-realized [volatility], so [we are] not surprised to see Paradigm customers playing for a sharp rally back in spot and vol.”
The word outright call buying implies that calls purchased were likely standalone trades, betting on renewed upside price volatility in bitcoin and not a part of a complex strategy. Since early 2023, bitcoin’s price and implied volatility have been mostly positively correlated.
A straddle is a non-directional strategy involving the simultaneous purchase of call and put options at the same strike price. Its purpose is to profit from an expected spike in implied volatility and the resulting rise in options prices.
Bitcoin has dropped over 15% since the ETF debuted on Jan. 11, with prices briefly falling below $41,000 late Thursday.
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