Most recently Bitcoin investors have heard of the growing influence of the Bitcoin Futures (BTC) and Options Markets on Bitcoin’s price. The same can be said about the price change caused by the liquidation in the OKEx and Huobi Stock Exchange.
As derivative markets now play a much larger role in bitcoin price fluctuations, it is increasingly necessary to revisit some of the key metrics that professional traders use to gauge market activity.
While dealing with futures and options contracts can be very complex, the average retailer can still benefit from knowing how to interpret the futures premium, financing rate, purchase option, and purchase ratio.
A futures premium shows how expensive long-term futures contracts can be in traditional markets today. This can be seen as a relative reflection of investor optimism, and fixed-calendar futures tend to trade at a small premium over regular spot exchanges.
Two-month futures should be trading at a 0.8% to 2.3% premium in healthy markets, and any number higher than this area indicates intense optimism. Meanwhile, the lack of a future premium indicates bearish tendencies.
On top of a two-month BTC forward contract. Source: Data on digital assets.
Last week was a rollercoaster ride with the index reaching 2% on November 24 and Bitcoin’s price peaking at $ 19,434.
Although the premium is currently at 1.1%, and most importantly, despite the 14% drop in prices, the rate remains above 0.8%. In general, investors see this level as optimistic, and today we see Bitcoin hitting a new high above $ 19900.
Eternal future funding rate
Permanent contracts, also known as reverse swaps, have a built-in interest rate that is usually charged every eight hours. Funding exchange rates ensure that there are no currency risk anomalies. Although both buyers and sellers open their interest at any time, the leverage can vary.
When it is the buyers (desires) who are claiming more influence, the financing rate becomes positive. Hence, these buyers will pay a commission. This problem is especially true when driving beef when the need for food is high.
Prices stable above 2% for the week are indicative of intense optimism. This level is acceptable while in the market, but it does present a problem if BTC price is in a sideways or downtrend.
In such cases, higher purchasing power makes possible large liquidations during unexpected price drops.
Funding rates for permanent bitcoin futures. Source: Data on digital assets.
Note how the weekly funding rate, despite recent bullish gains, ended below 2%. This data shows that while traders are optimistic, the buyers were not overly leveraged. Likewise, the index remained at a good neutral level during the $ 1,400 price drop on November 26th.
The options are skewed
Unlike futures contracts, options are split into two parts. Call (Buy) options allow the buyer to buy BTC at a fixed price on the expiration date. On the other hand, the seller of the instrument will be required to sell BTC.
The delta divergence compares 25% to the equivalent buy (buy) and sell (sell) options. If protection from price increases when using buy options costs more, the deviation indicator turns into a negative range. The opposite is true when investors are bearish, resulting in selling options trading at the premium and positivity of skewed indicators.
Volatility from -15% (slightly bullish) to + 15% (moderate bearish) is typical and expected. It is unusual for any market to remain steady or close to zero most of the time.
As such, traders should be on the lookout for more extreme situations, as they may indicate that market makers are unwilling to take risks on both sides.
The chart above shows that options traders have been hesitant to enter into positions that could lead to gains since November 5th. Hence, traders will find this situation extremely optimistic.
By gauging whether more activity is coming through calls or selling options, overall market sentiment can be gauged. Usually buy options are used for bullish strategies and sell options for bearish ones.
The bet ratio of 0.70 indicates long options are open at 30% and therefore bullish.
In contrast, the 1.20 Index supports short options at 20%, which may be considered bearish. It is worth noting that the index aggregates the entire BTC options market, including all calendar months.
In situations like the ones we are currently seeing in the market, it is natural for investors to seek loss protection because BTC is above $ 19,000, even though the buy / sell ratio was well below the 6-month average of 0.90. The current level shows 0.64 The absence of pessimism on the part of professional traders.