Bitcoin BTC$90,470.56 Options have made a complete 180 degree turn from a very bullish bet last year to a sharply bearish stance, reversing the scenario.
Since late last year, traders have been actively chasing bullish moves in Deribit by accumulating call options with strike prices of $100,000, $120,000 and $140,000. Until recent weeks, the $140,000 call was the most popular on Deribit, and the nominal open interest (OI), or dollar value of active contracts, was consistently above $2 billion.
Well, that has changed. The open interest for the $140,000 call is $1.63 billion. Meanwhile, $85,000 puts took the lead with $2.05 billion in open interest. The puts with strike prices of $80,000 and $90,000 also now outweigh the $140,000 call.
With BTC price down more than 25% to $91,000 since October 8, according to data from CoinDesk, it is clear that sentiment has shifted decisively to the bearish side, but not surprisingly.
A put option gives the buyer the right, but not the obligation, to sell the underlying asset at a specified price at a later date. Buyers of puts are implicitly bearish on the market and seek to profit from or avoid an expected decline in the price of the underlying asset. Call buyers are bullish.
BTC Options: Distribution of open interest on various exercises. (Delibit)
This chart shows the distribution of open interest in BTC options at various strike price levels over expiration. Clearly, OI is stacking up with low exercise puts, so-called out-of-the-money put options.
Although the number of active calls remains significantly higher than puts, the latter are trading at a significant premium (or skew), reflecting downside concerns.
“Options are reflecting year-end caution. Short-term puts with $84,000 to $80,000 strikes are seeing the highest volume today. Front-end implied volatility is near 50%, and the curve shows significant put skew (+5% to 6.5%) for downside protection,” Jean-David Pequinho, chief commercial officer at Deribit, said in an email.
Options trading on decentralized exchange Derive.xyz shows a similar bearish picture, with the 30-day skew falling from -2.9% to -5.3%, a sign that traders are increasing their downside insurance or put option payouts.
“Towards the end of the year, we are currently seeing a significant concentration of BTC put buildup around the December 26th expiry, particularly around the $80,000 strike,” Dr. Sean Dawson, head of research at leading on-chain options platform Derive.xyz, told CoinDesk.
With continued concerns about the resilience of the U.S. job market and the probability of a December rate cut dropping to a coin flip, there is little macro backdrop for traders to remain bullish through the end of the year, Dawson explained.
What's next?
Although the path of least resistance appears to be towards the downside, the sell could quickly run out of steam as technical indicators point to an oversold situation and sentiment is at its bearish peak.
“The Fear & Greed index is around 15, the RSI is nearing 30 (oversold but not yet extreme), and whale wallets (>1,000 BTC) have increased significantly over the past week, suggesting smart money accumulation at undervalued levels,” Pequinho said.
“Overall, downside fears are justified in the short term, and the path of least resistance remains low for now, but extreme setups like this have rewarded the bold in crypto's past,” he added.
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