The options market tracking bitcoin (BTC) suggests that the once-overwhelming fear of an extended slide has subsided, a sign that the worst may be over for the price of the cryptocurrency.
For the first time since March, both long-term and short-term skews have climbed to zero, which indicates that the demand for puts or downside protection relative to calls or bullish bets has weakened. Skew measures the spread between the implied volatility of calls and puts.
A call option gives the purchaser the right, but not the obligation, to buy the underlying asset at a predetermined price on or before a specific date. A put option gives the right to sell. Implied volatility refers to expectations for price turbulence over a particular period and is influenced by demand for options.
So, a positive call-put skew indicates greater demand for calls, while a negative skew implies bias for puts. A neutral or near zero skew is a sign the demand for bullish and bearish bets is balanced.
"The market sentiment has returned to neutral after a long time," Griffin Ardern, a volatility trader from crypto asset-management firm Blofin, told CoinDesk. "That's one of the important signals that the market may have found a bottom."
The 30-, 90- and 180-day skews have returned to near zero for the first time since late March/early April. The 60-day skew has turned marginally positive, a hint of a bias for calls expiring in two months.
The sentiment has flipped from negative to neutral amid hopes that the Federal Reserve will slow down its pace of monetary tightening starting in December. The Fed has raised rates by 300 basis points this year in an effort to control inflation, putting risk assets, including cryptocurrencies, under pressure.
"Suppose the Fed eventually chooses to ease monetary policy gradually. In that case, we may witness a gradual recovery in the market in recent months," Ardern said.
The Fed is likely to raise rates by 75 basis points on Wednesday and signal a step down to 50 basis points in December.
That said, it's still too early to bet on a price rally by purchasing call options, according to options analytics firm Genesis Volatility.
"Spot prices DO INDEED look constructively bullish … but that said, Q4-22 doesn’t resemble the Q4-20 environment, where buying call exposure was the right move to make," Gregoire Magadini, CEO of Genesis Volatility, said in a weekly newsletter. "[build] Tactial long but don't ape into unhedged calls."
According to Magadini, the Fed's forward guidance for future hikes will be the big unknown. "Global central banks are starting to soften their hawkish tone, but Powell may not follow suit," he said, referring to Fed Chairman Jerome Powell.
Bitcoin was changing hands at $20,700 at press time, according to CoinDesk data.
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