Bitcoin’s recent dip in implied volatility has sparked a surge in bullish sentiment among traders who see an opportunity in the relatively low-cost options. These traders are capitalizing on the situation by strategically placing optimistic bets on the cryptocurrency.
Bitcoin Bulls Gain Momentum as Implied Volatility Takes a Downturn
Options, as derivative contracts, grant the buyer the right to buy or sell the underlying asset at a predetermined price in the future. Calls, which provide the right to buy, enable traders to benefit from or safeguard against upward price movements. Conversely, put options offer the opposite scenario.
Traders perceive options as inexpensive when implied volatility, a crucial factor influencing options prices, falls below its long-term average or the realized volatility of the asset. Implied volatility represents the expected price range of the underlying asset over a year with a one standard deviation, and it tends to revert to a mean. Realized volatility, on the other hand, accounts for the price movement that has already occurred.
Bitcoin’s implied volatility reached its peak with the recent introduction of spot ETFs in the U.S. and has now dipped below realized volatility. This has led to increased interest in purchasing calls at specific strike prices, such as $45,000 and $46,000, during Thursday’s North American trading hours. Institutional cryptocurrency trading network Paradigm reported significant activity in the market.
Rising Confidence in Bitcoin with a Decrease in Implied Volatility
Paradigm observed, “We saw a large buyer of Feb $44k straddles and some outright call buying in the $45k /$46k strikes.” The fact that these calls were outright purchases suggests that they were likely standalone trades, indicating a straightforward bet on the potential for renewed upward price volatility in bitcoin. The current trend reveals a positive correlation between bitcoin’s price and implied volatility since early 2023.
Leave a comment