Bitcoin options turned the tables with a complete 180 degree shift from last year’s ultra-bullish bets to a distinctly bearish stance.
Since late last year, traders have been aggressively pursuing bullish moves by accumulating call options at strike prices of $100,000, $120,000, and $140,000 on Deribit. Until recent weeks, the $140,000 call was the most popular on Deribit, with notional open interest (OI), or the dollar value of active contracts, consistently above $2 billion.
Now that has changed. Open interest for the $140,000 call stands at $1.63 billion. Meanwhile, the $85,000 put took the lead with $2.05 billion in open interest. The $80,000 and $90,000 puts now also eclipse the $140,000 call.
Clearly, sentiment has turned significantly bearish, and that’s not surprising, since the price of BTC has crashed more than 25% to $91,000 since October 8, according to CoinDesk data.
Put options give the buyer the right, but not the obligation, to later sell the underlying asset at a predetermined price. A put buyer is implicitly bearish in the market, seeking to profit from or protect against expected price declines in the underlying asset. A call buyer is optimistic.
The chart shows the distribution of open interest on BTC options at different strike price levels across expirations. Obviously, IO stacks with inferior puts, called out-of-the-money puts.
Although the number of active call options remains significantly higher than that of puts, the latter trade at a significant premium (or bias), reflecting downside fears.
“Options reflect caution as we approach the end of the year. Short-term puts with strike prices between $84,000 and $80,000 saw the largest trading volumes today. Initial implied volatility is around 50% and the curve shows a strong put bias (+5% – 6.5%) for downside protection,” said Jean-David Pequignot, chief commercial officer of Deribit, in a email.
Options activity on decentralized exchange Derive.xyz paints a similar bearish picture, with 30-day skew falling to -5.3% from -2.9%, a sign that traders are increasingly paying more for downside insurance or puts.
“Looking towards the end of the year, there is now a significant concentration of BTC building around the December 26 expiration, particularly during the $80,000 strike,” Dr. Sean Dawson, head of research at leading on-chain options platform Derive.xyz, told CoinDesk.
With ongoing concerns about the resilience of the U.S. labor market and the likelihood that a December rate cut will barely slip past a coin toss, there is very little in the macroeconomic backdrop that gives traders reason to remain optimistic through the end of the year, Dawson explained.
And then?
Even though the path of least resistance appears to be to the downside, selling may soon run out of steam as technical indicators indicate oversold conditions and sentiment is at bearish extremes.
“With the Fear and Greed Index around 15 and the RSI near 30 (oversold but not yet extreme), whale wallets (>1,000 BTC) increased significantly last week, hinting at an accumulation of smart money at undervalued levels,” Pequignot said.
“Overall, downside fears are justified in the short term and the path of least resistance remains weaker for now, but extreme setups like this have rewarded the bold in crypto’s past,” he added.
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