The recent surge in Bitcoin’s (BTC) price to two-month highs has generated increased demand for call options and pumped up activity in the options market. The cryptocurrency’s value skyrocketed to $30,800 on Wednesday, mainly driven by the flurry of spot Bitcoin ETF applications by BlackRock, WisdomTree, and Invesco. These filings demonstrate a strong institutional appetite for the world’s largest cryptocurrency.
This sudden shift in market trajectory from just a week ago, when BTC prices briefly dipped below $25,200, has prompted traders to turn their attention to options in pursuit of the rally. On Wednesday alone, $3.3 billion worth of Bitcoin options contracts changed hands across major exchanges, such as Deribit, marking the highest single-day notional volume in three months. According to Lin Chen, Deribit’s Asia business development personnel, the platform witnessed its most significant trading volume in the past three months, with a massive interest in buying call options.
Options grant investors the right to purchase or sell an underlying asset, like Bitcoin, at a predetermined price at a later date. Traders often buy calls as a low-cost, leveraged bullish bet. Over the past 24 hours, call options at strike prices of $30,000, $31,000, $32,000, and $40,000 have become increasingly popular among traders.
In the past week, call spreads have made up 45% of total block flows, which are large orders executed on over-the-counter (OTC) liquidity networks like Paradigm and then listed on exchanges. Patrick Chu, director of institutional sales and trading at Paradigm, notes that the price rally has forced some call overwriters to buy back into the bullish market. Call overwriting is a popular strategy for generating additional yield in a flat-to-negative market by selling calls against the owned cryptocurrency.
As demand for options rises, the bitcoin volatility index (DVOL) on Deribit increased to 59.24—the highest level since early April. The DVOL gauges Bitcoin’s 30-day implied volatility (IV) using Deribit’s options order book. Higher demand for options results in higher IV and vice versa.
Historically, implied volatility tends to surge during risk aversion periods in traditional markets. However, Deribit’s DVOL typically experiences an uptick when prices increase. Chen explains that Bitcoin’s implied volatility and spot prices have been positively correlated since the beginning of the year. Chu points out that the recent headlines and price movements have caught the market off-guard, causing some to scramble for coverage.
Source: Coindesk
