Bitcoin's put-call open interest ratio has slipped to six-month lows, indicating an ebbing of bearish sentiment.
According to data tracked by options analytics platform Skew, the ratio measuring the number of open positions, or open interest in put options relative to open interest in call options, fell to 0.60 on Wednesday, a level last seen in early January.
"The ratio has come down, indicating growing demand for call options, which could be interpreted as a positive signal, demonstrating a potential decline in overall bearish sentiment," Luuk Strijers, chief commercial officer at Deribit, the world's largest crypto-options exchange by open interest and trading volume, told CoinDesk in a Telegram chat.
Call options give the purchaser the right but not the obligation to buy the underlying asset at a predetermined price on or before a specific date. A call buyer is implicitly bullish on the market. A put option gives the right to sell and represents a bearish bet.
The put-call open interest ratio peaked at 0.94 in April and has been falling ever since.
"We perceive the overall slide in the ratio as a bullish indicator," Nick Mancini, a research analyst at Trade the Chain, said. "If the number of puts open relative to calls is decreasing, traders are taking less bearish outlook and are prepping for bullish price action."
The ratio slipped to a then six-month low of 0.45 in late December and remained mainly in the range of 0.50 to 0.70 in January as flows were concentrated on the call side. Bitcoin topped the long-held $20,000 resistance in December and rallied by 100% to nearly $60,000 in the first quarter of this year.
"When the market was bullish in January, we could see a lot of flows buying calls at strikes 50% above bitcoin's going market price," Martin Cheung, an options trader from Pulsar Trading Capital, said in a Telegram chat.
Cheung said the ratio's slide from highs seen in April and May indicates the market has calmed down and digested most of the negative news flow.
That said, drawing conclusions from the put-call open interest ratio can be problematic, because the measure does not reveal whether the number of positions open is mainly on the bullish or bearish side.
For example, some market participants may have sold call options in recent weeks, adding to the tally of the number of open positions in calls – the ratio's denominator – and contributing to the downward pressure on the ratio. Savvy traders often sell call options, that is insurance against a bullish move, when they expect the market to consolidate or drop.
"You have to bear in mind that the put-call open interest ratio can give the wrong message," Deribit's Strijers said. "For example, users shorting upside calls contribute to open interest and volumes for calls; however, that is a bearish strategy."
Nevertheless, the recent decline in the put-call open interest ratio may have been fueled at least partly by a pickup in demand for calls or unwinding of long put positions, that is unwinding of bearish bets.
Bitcoin is currently trading at $33,230, a 5% drop on the day. While the put-call ratio is giving bullish hints, the options smile shows persistent concern of an extended sell-off and greater demand for puts or bearish bets at strikes lower than bitcoin's current market price.