Deribit, the crypto exchange, is the absolute leader on the Bitcoin (BTC options) markets. On Nov. 24, the 25% Delta skew indicator indicated that pro traders were becoming “more bearish overall.”
Since Nov 1, we have seen the 25-Delta putskew move from around 0% up to close to 10-15% pending expiry time, implying a bearish overall sentiment. Premiums for protection against the downward are becoming more costly. This expiry has a max pain of $58k in the short-term. https://t.co/jhpT1riX3g
— Deribit (@DeribitExchange) November 24, 2021
Bitcoin price seems to be following a downward channel since Nov. 9. This could indicate that Bitcoin’s 22% decline since its $69,000 high might be “bearish”.
Bitcoin/USD price on Bitstamp. Source: TradingView
The 25% delta skew is a comparison of call (buy) options and put (sell). This will be positive if the premium for protective put options is greater than comparable risk options. It indicates bearish sentiment.
If market makers lean bullish, the opposite is true. This causes the 25% delta-skew indicator to enter a negative range.
Bitcoin 30-day 25% delta skew. Source: laevitas.ch
Negative 8% or positive 8% readings are generally deemed neutral. Deribit’s analysis therefore shows that there was a significant shift towards fear on Nov. 23. The indicator has now moved to 8% and is no longer supporting the bearish stance of traders.
What has happened to the futures market?
Futures markets can also be used to confirm that the movement was unique to that instrument.
The futures premium, also called the “basis rate”, measures the difference between current spot market levels and longer-term futures contracts. In healthy markets, a 5% to 15% annualized premium can be expected. This is known as contango.
This price gap is caused when sellers demand more money to hold settlement for longer. A red alert appears whenever this indicator turns negative or fades, also known as “backwardation.”
Basis rate for 3-month Bitcoin futures. Source: laevitas.ch
Contrary to the options 25 delta skew which has moved to “fear”, the primary risk metric for futures was stable at 11% between Nov. 16-25. Its current 9% is neutral in futures markets, despite a slight drop and it’s not close to a bearish tone.
Call options are the most popular option for traders.
There are many reasons why market makers and pro traders using Bitcoin options markets charge too much for put (sell), options. They may be afraid of imminent danger after the U.S. Senate Committee requested information about stablecoins’ issuance on Nov. 23.
The Federal Reserve System board of governors announced that they were working on a series “policy sprints” to improve regulatory clarity in the crypto sector. Potentially, the administrative agencies will adjust compliance and enforcement standards for existing laws and regulations.
This does not explain why the uncertainties were not reported on Bitcoin futures markets. It is therefore questionable whether the 25% skew indicator should not be considered in this case.
Bitcoin Dec. 31 Options open Interest Source: Coinglass.com
The Dec. 31 Bitcoin options expiry holds 60%, totaling $13.4 billion of open interest. The above chart shows that there is virtually no interest in put (sell) options over $60,000.
Call (buy) options are 145% greater than the protective put for Dec. 31 so it is not worth worrying about how market makers price these instruments. The 25% delta skew should not be considered significant despite Deribit’s bearish warning.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.