Bitcoin put options, derivatives offering downside protection, continue to become pricier, implying bearish sentiment. The price volatility may rise as major exchanges, including Deribit, are due to settle monthly options on Friday.
The three-month put-call skew, which measures the cost of puts relative to calls, has turned positive, hit a 6-week high of 3%, according to data provided by the crypto derivatives research firm Skew.
The positive number shows that put options are drawing higher prices or demand than calls or bullish bets. At the start of the month, the three-month gauge stood at -5%, indicating a bullish bias.
The one-week and one-month put-call skews have seen similar ascents this month and are signaling bearish bias with above-zero prints. The six-month put-call skew has turned neutral.
A positive skew does not necessarily mean traders are taking outright bearish bets rather they could be adding downside protection against long positions in the spot or futures markets.
In any case, it indicates fear in the market, which is warranted, given bitcoin’s 16% fall after hitting a record high of $68,990 on Nov. 10.
According to a theory, the max pain acts as a magnet while heading into the expiry as option sellers, typically large institutions, buy or sell the underlying asset to keep the price around key levels to inflict maximum loss on buyers.
While there is no evidence of sellers using such strategies in the bitcoin market, the cryptocurrency has, in the past, moved in the direction of the max pain point ahead of expiry and gained strong directional bias after the settlement.
So, the prospects of a big move in the next day or two cannot be ruled out, more so, as volumes are likely to be thin due to the Thanksgiving holiday.
Bitcoin was last seen trading near $58,200, representing a 1.8% gain on the day.