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Most investors who follow Bitcoin will have recently heard of the growing impact of Bitcoin futures and options (BTC) markets on the price of Bitcoin. The same is true for price fluctuations caused by liquidations on the OKEx and Huobi exchanges.
As derivatives markets now play a much larger role in Bitcoin price movements, there is a growing need to revisit some of the key metrics professional traders use to assess activity in the markets.
While reviewing futures and options contracts can be quite complicated, the average retail trader can still benefit from knowing how to correctly interpret the term premium, funding rate, options bias, and the put-call ratio.
Remium futures
The term premium measures the cost of long term futures contracts relative to the current price in traditional markets. This can be seen as a relative reflection of investor optimism, and futures with a fixed schedule tend to trade at a slight premium over regular spot trades.
2 month futures are expected to trade at a premium of 0.8% to 2.3% in healthy markets, and any number above this range indicates extreme optimism. Meanwhile, the absence of a term premium indicates a decline.
Last week was a roller coaster and the indicator hit 2% on November 24, while the price of Bitcoin peaked at $ 19,434.
Even if the premium is currently at 1.1%, what is more significant is that despite a price drop of 14%, the indicator has remained above 0.8%. In general, investors view this level as bullish, and today we can see the price of Bitcoin has reached a new high above $ 19,900.
Perpetual Term Finance Rate
Perpetual contracts, also known as reverse swaps, have a built-in rate that is typically billed every eight hours. The financing rates ensure that there is no imbalance in the exchange risk. Even though the open interest of buyers and sellers matches at all times, the leverage may vary.
When the (long) buyers are the ones asking for more leverage, the finance rate becomes positive. Therefore, these buyers will be the ones paying the costs. This problem is especially true in periods of bullish bullishness, when there is usually more demand for longs.
Sustained rates above 2% per week translate into extreme optimism. This level is acceptable during market rallies but problematic if the BTC price is sideways or in a downtrend.
In such situations, high buyer leverage presents the potential for large sell-offs during surprise price drops.
Notice how, despite the recent uptrend, the weekly finance rate has managed to stay below 2%. These data indicate that while traders feel bullish, buyers have not been over-leveraged. Likewise, during the price drop of $ 1,400 on November 26, the indicator maintained a healthy neutral level.
Tilt options
Unlike futures contracts, options are divided into two segments. Call options allow the buyer to acquire BTC at a fixed price on the expiration date. On the other hand, the seller of the instrument will be obligated to proceed with the BTC sale.
The 25% asymmetric delta compares the equivalent buy (buy) and sell (sell) options side by side. If protection against price spikes using call options is more expensive, the bias indicator moves to the negative range. The opposite is true when investors are bearish causing put options to trade at a premium resulting in a positive change in bias indicators.
Oscillations between -15% (slightly bullish) and + 15% (somewhat bearish) are typical and expected. It is very unusual for a market to remain stable or close to zero most of the time.
Thus, traders should watch for more extreme situations as they may indicate that market makers are unwilling to take risks on either side.
The chart above shows that as of November 5, options traders are unwilling to take positions exposing themselves to the upside. Therefore, traders will find this situation very optimistic.
Option buy / sell ratio
By measuring whether more activity is going through calls (calls) or puts (puts), one can gauge overall market sentiment. Generally speaking, call options are used for bullish strategies, while put options are used for bearish strategies.
A put / call ratio of 0.70 indicates that open put interest is 30% behind the most bullish calls and is therefore bullish.
In contrast, an indicator of 1.20 favors put options by 20%, which can be considered bearish. One thing to note is that the indicator aggregates the entire BTC options market including all calendar months.
In situations such as that currently seen in the market, it is only natural for investors to seek downside protection as BTC exceeds $ 19,000, even though the put / call ratio has been well below its average over 6 months from 0.90. The current level of 0.64 shows that there is a lack of pessimism on the part of professional traders.
Overall, these four key indicators have remained stable, especially since the market has just suffered a somewhat traumatic pullback as the price of BTC fell to retest $ 16,200.
With the price returning above $ 19,500, almost every investor wants to know if Bitcoin has enough strength to break its all-time high this week.
From a derivatives trading perspective, nothing is holding it back.
The views and opinions expressed herein are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You need to do your own research when making a decision.
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