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| Bitcoin options worth almost $3 billion were expected to expire on Friday as traders watched market sentiment and price movement. |
Negative Sentiment Grips Bitcoin Ahead of $3B Options Expiry
Bitcoin put options, derivatives offering downside protection, kept becoming pricier, suggesting negative sentiment. Price volatility might rise as major exchanges, including Deribit, were due to settle monthly options on Friday.
The three-month put-call skew, which measures the cost of puts compared with calls, had turned positive, hitting a 6-week high of 3%, as indicated by information given by the crypto derivatives research firm Skew.
The positive number showed that put options were drawing greater costs or interest than calls or bullish positions. At the beginning of the month, the three-month measure remained at -5%, showing a bullish inclination.
The one-week and one-month put-call skews had seen similar climbs this month and were showing negative bias with above-zero prints. The half-year put-call skew had turned neutral.
A positive skew does not really mean traders are taking completely negative positions. Rather, they could be adding downside protection against long positions in the spot or futures markets.
Regardless, it showed fear in the market, which was justified, given Bitcoin's 16% fall after hitting a record high of $68,990 on Nov. 10.
Worries that the U.S. Federal Reserve (Fed) may plan a quicker end to its two-year stimulus program and the resulting strength in the dollar appeared to have driven the cryptocurrency lower. The Dollar Index, which tracks the greenback's value against major fiat currencies, had increased by 3% since the hotter-than-expected U.S. inflation data released on Nov. 10.
The Fed started scaling back the monthly bond-buying program from this month and stood prepared to speed up the withdrawal of stimulus if things kept on warming up. Minutes from the November Fed meeting released on Wednesday showed that policymakers were ready to raise interest rates if inflation kept on rising.
In this way, the dollar might stay strong in the coming days, keeping Bitcoin gains under pressure.
Options Expiry
Information given by Skew showed a total of 51,900 options contracts worth almost $3 billion were due to expire on Friday. About $2.5 billion worth of options were to be settled by Deribit, the world's largest crypto options exchange, at 08:00 am UTC.
Most of the open interest was concentrated in call options at strikes above Bitcoin's record price. The max pain, or the price level at which option buyers would experience the most loss on expiry, was $58,000.
As indicated by a theory, the max pain acts as a magnet while heading into the expiry as option sellers, usually large institutions, buy or sell the underlying asset to keep the price around key levels to create the most loss for buyers.
While there is no proof of traders using such strategies in the Bitcoin market, the cryptocurrency has, in the past, moved toward the max pain area before expiry and gained strong directional bias after the settlement.
In this way, the possibility of a major move in the next little while could not be ruled out, especially as volumes were likely to be thin because of the Thanksgiving holiday.
At that time, Bitcoin was seen trading close to $58,200, representing a 1.8% gain on the day.