Exploring the Surge in Optimistic Bullish Bitcoin Amid Declining Implied Volatility
As Bitcoin (BTC) options become more attractively priced, a trend of increasing bullish bitcoin has emerged among traders. Options, essentially derivative contracts, empower buyers with the choice to either purchase or sell the referenced asset at a pre-agreed price on a future date. Call options offer the right to buy, beneficial for those looking to capitalize on or safeguard against potential price surges. In contrast, put options serve the opposite function.
The affordability of options is often assessed based on implied volatility – a crucial factor influencing their price. When implied volatility falls below its historical average or the asset’s actual price movements, options are deemed inexpensive. Implied volatility represents the expected one-year price fluctuation range of the underlying asset, typically reverting to the mean over time. Realized volatility, on the other hand, refers to already occurred price movements.
A notable shift in Bitcoin’s implied volatility (IV) was observed following the recent introduction of spot ETFs in the United States. This IV has since fallen beneath the asset’s realized volatility, sparking increased interest in call options, particularly at the $45,000 and $46,000 levels during a trading session in North America. This information was shared by Paradigm, a key player in institutional cryptocurrency trading, via a Telegram message.
Paradigm noted, “We witnessed substantial buying of Feb $44k straddles along with outright call purchases at the $45k and $46k levels. With BTC’s implied volatility now trailing behind realized volatility, it’s unsurprising to see our clients betting on a significant spot and vol rebound.” The term ‘outright call buying’ suggests these were standalone transactions, predicting a rise in Bitcoin’s price volatility, rather than part of a more intricate strategy. Since early 2023, a positive correlation between Bitcoin’s price and its implied volatility has been evident.
Straddles, a neutral strategy involving simultaneous call and put option purchases at an identical strike price, aim to benefit from anticipated spikes in implied volatility and the subsequent increase in option prices.
Bitcoin’s value has experienced a decline exceeding 15% since the ETF’s debut on January 11, with its price momentarily dipping below $41,000 towards the end of the week.
