Bitcoin’s 4.09% surge has triggered a positive sentiment among crypto option traders. It has been holding at $18,935, while Ether up by 0.95% was trading at $1,410. The top two cryptocurrencies by market cap gained 13% in the past seven days.
Andrew Melville, a research analyst at Block Scholes, believes Bitcoin’s short-dated out-of-the-money (OTM) calls have seen an increase in implied volatility compared to OTM puts. He said it continues the trend of the volatility smile towards a more neutral smile which was previously driven by falling demand for downside protection throughout December. The analyst explained that Bitcoin’s derivatives market is now not only pricing for a drop in the bearish sentiment. It reflects an increase in demand for exposure to upwards movements.
The bullish shift shows confidence among sophisticated market participants that Bitcoin’s rally to two-month highs may be only the first milestone in its upward trajectory. Analysts describe the volatile smile as a graphical representation of implied volatility for a series of bullish call and bearish put options at different strikes. However, it will have the same underlying and expiration date. Implied volatility, on the other hand, is the market’s expectation of the future price turbulence of the underlying asset. It’s directly influenced by supply and demand for call-and-put options.
According to Block Scholes’s chart, Bitcoin’s volatile smile on December 6 looked more like a smirk with greater implied volatility on options at lower strikes. This is a sign of stronger demand for downside protection. But the smirk vanished because of the decline in demand for puts and an increase in demand for calls.
Vijay Ayyar, vice president of corporate development and international at Luno, pointed out that Bitcoin has been in a downtrend for over a year now, which is a standard period of a bear market in crypto. He said there have been many negative events over the past year. And the crypto price, in general, has been declining less and less. This is an indication that the market is accepting well and sell pressure is being absorbed – thus, an accumulation stage.