Bitcoin (BTC) options trading currently looks cheap, and some traders are taking advantage of this to make bullish bets.
An option transaction is a derivative contract that gives the buyer the right to buy or sell an underlying asset at a predetermined price in the future. Call options give the right to buy, allowing traders to profit from or hedge against rising prices. A put option gives you the right to sell the opposite.
Reducing implied volatility
Traders consider an option to be cheap when its implied volatility, one of the main determinants of option prices, is below its long-term average or below the asset’s realized volatility. Implied volatility is the range of one standard deviation of the expected one-year change in the price of the underlying asset, which tends to revert to the mean. Realized volatility, on the other hand, refers to price changes that have already occurred.
According to Paradigm, a crypto asset trading network for over-the-counter institutional investors, Bitcoin’s implied volatility peaked with the launch of spot ETFs in the United States and is now below realized volatility. Demand for calls with strike prices of $45,000 and $46,000 has increased during North American trading hours.
“The $44,000 February straddle saw heavy buying, with some buying outright calls at $45,000/$46,000 strike prices,” Paradigm said on Telegram. . “Bitcoin’s implied volatility is currently running well below its realized volatility, so I wouldn’t be surprised to see Paradigm clients playing for a sharp resurgence in spot and volatility. ” he commented.
Positive correlation with price
Buying an outright call suggests that the call being purchased is likely a standalone trade betting that the price of Bitcoin will rise and is not part of a complex strategy. Since the beginning of 2023, Bitcoin price and implied volatility have been almost positively correlated.
A straddle, on the other hand, is a directionless strategy that involves buying a call option and a put option at the same time with the same strike price. The objective is to profit from the expected spike in implied volatility and the resulting increase in option prices.
Since the ETF was launched on January 11, Bitcoin has fallen more than 15%, with the price briefly falling below $41,000 on the 18th.
｜Translation and editing: Rinan Hayashi
｜Image: Hans Eiskonen/Unsplash
｜Original text: Bullish Bitcoin Bets Rise as Implied Volatility Slides