Bitcoin options traders anticipate short-term price correction, analysts say

Quick Take

  • Bitcoin derivatives traders are still ready to pay a premium for short-term downside protection, analysts say.
  • However, a longer-term outlook shows a more optimistic options distribution, skewed towards calls, the analysts added. 

Despite yesterday's softer U.S. CPI inflation report, investors are still ready to pay a premium for short-term downside protection, according to CF Benchmarks' analysis of Chicago Mercantile Exchange (CME) options on bitcoin futures.

The CF Benchmarks analysts said that although bitcoin saw a breakout above the $66,000 mark after yesterday's softer inflation print, there is still "higher implied volatility for OTM puts compared to calls."

They added that derivatives traders' willingness to pay elevated premiums for out-of-the-money (OTM) puts serves as a bearish short-term market indicator. The increased implied volatility (IV) for OTM puts indicates that traders are essentially hedging against the potential decline in bitcoin's value.

IV is a measure used in the options market that represents the market’s forecast of an asset or security’s likely movement or price fluctuations in the future.

Longer-dated options skew toward calls

In contrast to the short-term outlook, the analysts pointed to a "flatter" volatility curve between longer-dated puts and calls, with a slight skew towards calls. "This suggests investors are more optimistic about bitcoin's longer-term prospects, and it is worth watching to see if the skew to calls increases if expectations of disinflation start to accelerate after the favorable CPI report," the analysts said in an email sent to The Block.

The CF Benchmarks analysis observed that the relative flatness of longer-dated puts and calls might also suggest increased institutional involvement "as these investors are less prone to extreme swings in sentiment."

Options are derivative contracts that give a trader the right but not the obligation to buy or sell the underlying asset at a predetermined price on or before a specific date. A call option gives the right to buy, and a put offers the right to sell. It is assumed that a trader who buys a call option is implicitly bearish on the market, while a put buyer is implicitly bearish.

CME Group plans to launch bitcoin spot trading

According to the Financial Times, the CME Group is considering launching bitcoin spot trading in addition to its existing futures products. The group has reportedly been discussing with traders who prefer dealing with cryptocurrencies on a regulated platform.

The FT report added that the launch of bitcoin spot trading on CME would allow traders to profit from so-called basis trades, where they would gain by exploiting the difference between futures prices and the underlying asset’s spot price.

CME Group owns the world’s largest futures exchange and already supports bitcoin futures trading. However, the FT report said the plan has not been finalized, and the CME Group declined to comment on the matter.

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