Deribit is the absolute leader in the Bitcoin (BTC) options markets, and on November 24, a 25% delta skew indicator indicated that the sentiment of professional traders was “more bearish overall.”
Bitcoin price appears to be following a descending channel since November 9, so the bearish signal may be a reversal of a 22% drop from the all-time high of $69,000.
Bitcoin/US dollar price on Bitstamp. Source: TradingView
A delta offset of 25% compares put (call) and put (call) options side by side. It will be positive if the premium for protective selling is above the corresponding risk call, thus indicating bearish sentiment.
And vice versa when market makers tend to the upside and this causes the 25% delta rejection indicator to enter a negative range.
Bitcoin’s 30-day delta error is 25%. Source: laevitas.ch
Measurements between negative 8% and positive 8% are generally considered neutral, which is why Deribit’s analysis was correct when he claimed a significant shift toward “fear” on November 23. But on November 26 this movement slowed down as it is now. At 8% it is no longer supporting the downtrend for traders.
What happened in the futures markets?
The futures markets should also be analyzed to confirm whether this movement is specific to a particular instrument.
The futures premium, also known as the “base price,” measures the difference between long-term futures contracts and current spot market levels. In healthy markets, an annual premium of 5% to 15% is expected, this is known as contango.
This price gap is caused by sellers asking for more money to delay settlement for a longer period, and every time this indicator turns off or turns negative, a red warning known as “Reverse Transfer” appears.
Base price of 3-month bitcoin futures contract. Source: laevitas.ch
In contrast to options delta skew 25%, which changed to fear, the initial risk account for futures contracts was relatively stable at 11% from November 16-25. Despite the slight decline, the current 9% is neutral to the futures markets and is not even close to a bearish tone.
Traders mainly use buy options
One can only guess why professional traders and market makers who use the bitcoin options markets are inundated with put (sell) options. They may be wary of imminent danger after the November 23 US Senate committee requested information on the issue of the coins being hoarded.
On the same day, the Federal Reserve announced it is working on a series of “policy races” aimed at providing regulatory clarity to the crypto industry. Officials can modify compliance and enforcement standards in line with current laws and regulations.
However, this does not explain why this uncertainty is not reflected in the Bitcoin futures markets. Thus, the question must be asked whether the 25% asymmetry should be neglected in this case.
Bitcoin options open interest december 31. Source: Coinglass.com
Bitcoin options expiring on December 31 have 60% of the current open interest rate and a total risk of $13.4 billion. As you can see from the chart above, there is virtually no interest rate on put (call) options over $60,000.
Since there are 145% more buy (buy) options than the December 31st shields, you don’t have to worry about how the market makers will evaluate these tools. So a delta deviation of 25% should not be of any significance at the moment, despite the bearish Derpt warning.