Institutions Still Skeptical of a Near-Term Bitcoin Price Rally, CME Options Data Show

The higher implied volatility for short-dated puts suggests investors are willing to pay a premium for downside protection, CF Benchmarks said.

AccessTimeIconMay 17, 2024 at 6:45 a.m. UTC
Updated May 17, 2024 at 11:02 a.m. UTC
  • CME’s bitcoin options show investors continue to pay a premium for short-dated protective put options after Wednesday’s U.S. CPI release.
  • A broader outlook appears constructive, with longer-dated calls drawing relatively higher implied volatility.

While upbeat U.S. inflation data released early this week has restored institutional faith in bitcoin’s (BTC) long-term bullish case, it is yet to alleviate concerns of a near-term price pullback.

The odds of a near-term rally are still scant, according to CF Benchmarks’ analysis of options trading data on the Chicago Mercantile Exchange (CME), a platform widely regarded as a barometer of institutional activity.

According to CF Benchmarks, implied volatility for short-dated out-of-the-money (OTM) put options was higher than implied volatility for OTM calls following Wednesday’s softer-than-expected U.S. CPI release. These options are based on CME’s cash-settled standard bitcoin futures contract, which is sized at 5 BTC.

“The volatility skew, which represents the difference in implied volatility between out-of-the-money (OTM) puts and calls is quite pronounced in the shorter-dated options. The higher implied volatility [demand] for OTM puts compared to calls suggests investors are still cautious about near-term downside risks and are willing to pay a premium for protective puts,” CF Benchmarks said in a note shared with CoinDesk on Thursday.

Put options are derivative contracts that protect the buyer from price drops. A put buyer is implicitly bearish on the market, looking to profit from or hedge against potential price weakness. A call option offers insurance against price rallies. Put options at strikes lower than the going market rate and calls above the spot market price are considered out-of-the-money.

Implied volatility is an estimate of the future volatility of the underlying asset based on options prices. Implied volatility rises as demand for options increases.

CF Benchmarks is the U.K.-regulated provider of digital assets benchmarks like the CF Bitcoin Volatility Index. CF Benchmarks and CME also publish several crypto-related reference rates, including the CME CF Bitcoin Reference Rate and CME CF-Ether Dollar Reference Rate.

CME bitcoin options' volatility surface. (CF Benchmarks)
CME bitcoin options' volatility surface. (CF Benchmarks) (CF Benchmarks)

The volatility surface – a three-dimensional plot of the implied volatilities of bitcoin options – shows implied volatilities for short- and long-dated bitcoin options with different deltas or degrees of sensitivity to changes in the price of bitcoin. OTM options’ delta ranges from 0.5 to 0.

As can be seen, the post-CPI bias has been for OTM puts expiring in 20 to 40 days. Meanwhile, as we move toward longer-dated options, the skew flips in favor of calls or bullish bets.

“This indicates that investors are growing more optimistic about bitcoin’s longer-term prospects and are willing to pay more to be positioned for potential upside by buying OTM calls,” CF Benchmarks said.

The chart also shows relatively flat implied volatility levels for longer-dated options, a sign of increased institutional participation.

“This could be interpreted as a sign of increasing institutional involvement, as these investors often have a more nuanced view of the market and are less prone to extreme sentiment swings,” CF Benchmarks added.

A similar long-term bullish bias is seen in options trading on the cryptocurrency exchange Deribit, which accounts for over 85% of the global crypto options activity. As of writing, notional open interest or the dollar value of the number of open bitcoin options contracts on Deribit was $15.63 billion. Meanwhile, open interest in CME options was $417 million.

At the time of writing, bitcoin was trading at $65,550, representing a weekly gain of 6.6%, according to CoinDesk data.

Edited by Parikshit Mishra.


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Omkar Godbole

Omkar Godbole is a Co-Managing Editor on CoinDesk's Markets team.