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Futures traders were caught off guard by Bitcoin’s rapid rebound from lower lows over the last weekend, as evidenced by the spike in volumes on July 26. The Options market revealed some interesting trends as the entire market became more active following the 25% weekly gains.
Even though these unexpected price movements agitated the market, they were insufficient to propel Bitcoin’s price high enough to fuel the derivatives market. What’s the reason? Despite recent gains, Bitcoin has remained well below the $40k mark.
As much as most want to believe that this was a breakout, the crucial level of $42k is the one to look out for. The same was highlighted by a recent Ecoinometrics report.
“If you look at a price chart you’ll see that this (40K level) doesn’t count yet as a breakout. A real breakout would be a daily close above $42k which is pretty much the highest point BTC set in June after the crash.”
However, there is a noticeable shift in sentiment in the Options market as well. To begin, there were 7 puts for every 4 calls. This indicated that a greater number of traders are less concerned about the downside. In addition, a closer examination of the contracts revealed that there are five puts for every two calls in July and one put for every call after that.
This means that the market is skewed towards puts for the July contract, which expires in a few days. However, after July, sentiment appears to have returned to neutral.
BTC Options volume projected a bullish picture for July 29, the eighth consecutive day of Bitcoin closing in the green on a one-day chart. The top five BTC Options volumes were calls. Interestingly, 210 DBT were calling the shots on Bitcoin’s price reaching $100k by October-end.
Another interesting trend that was discovered was in the six-month Realized volatility (RV) vs. Implied volatility (IV) charts of Bitcoin. A parabolic rise in the IV in the midst of rising prices indicated that traders expect prices to rise even further. A parabolic move of this magnitude was last seen in May, when Bitcoin rallied. Will that be the case again this time?
That is dependent on whether Bitcoin reaches $42,000 by the end of this month.
Aside from that, Bitcoin’s one-month put-call skew, which measures the cost of puts versus calls or bearish bets versus bullish bets, fell sharply from 15% to -2% at press time. Furthermore, the total one-week put-call skew decreased from 13% to 5%.
This narrowing of the spread between put and call prices, as well as the narrowing of the spread between the IV and RV, essentially implies that most investors and traders are not looking forwards to another price drop.
However, Bitcoin will lose this bullish narrative unless it breaks through $42k. Any thoughts of BTC going above $100k should be entertained only at that point.