Most investors who closely follow Bitcoin will do so recently learned of the growing impact of Bitcoin (BTC) futures and options markets on the price of crypto-assets. The same applies to price fluctuations Settlements on the OKEx and Huobi exchanges.
Given that futures markets are now playing a bigger role in Bitcoin price fluctuations, There is an increasing need to analyze some of the key metrics that professional traders use to measure activity in the markets.
While analyzing activity in the futures and options markets can be very complicated, The average retailer can benefit from knowing how to correctly interpret the futures premium, funding rate, option delta steepness, and buy / sell ratio.
The futures premium measures how expensive longer-term futures contracts are in relation to the current spot rate in traditional markets. This can be viewed as a relative expression of investor optimism, and fixed-date futures contracts typically trade at a slight premium over regular spot exchanges.
Two month futures should be traded with a premium of 0.8% to 2.3% in healthy markets and anything above that range shows extreme optimism. The lack of a futures premium signals a bearish mood.
Last week was a roller coaster ride and the indicator reached 2% on November 24, while the price of Bitcoin peaked at $ 19,434.
Although the premium is currently 1.1%, it is more important that the price has fallen 14% The indicator stayed above 0.8%. Investors generally view this level as bullish, and today we can see that the price of Bitcoin has made a new high above $ 19,900.
Perpetual Futures Funding Rate
Perpetual contracts, also known as reverse swaps, have a built-in commission that is usually calculated every eight hours. The funding rates ensure that there are no currency risk imbalances. Although the open interest of buyers and sellers is the same at all times, leverage can vary.
When the (long) buyers demand the greatest leverage, the financing rate becomes positive. Hence, these buyers are the ones who pay the commissions. This situation is especially true during times of bull runs when more longs are usually in demand.
Sustained rates above 2% per week lead to extreme optimism. This level is acceptable during market rallies but becomes problematic when the price of BTC moves sideways or travels down.
In such situations The high leverage of buyers harbors the potential for cascading liquidations in the event of surprising price drops.
See how despite the recent bull run The weekly funding rate has stayed below 2%. This data shows that while traders are optimistic, buyers have not misused leverage. In the same way, During the price drop to USD 1,400 on November 26th, the indicator remained at a healthy neutral level.
Unlike futures contracts, options are divided into two segments. Call options allow the buyer to buy BTC at a fixed price on the expiration date. On the other hand, the seller of the instrument is obliged to carry out the sale of this BTC.
The slope of the delta of 25% compares the corresponding call and put options. If the protection against price increases through call options is more expensive, the inclination indicator is negative. The opposite is true when investors are bearish and put options are trading at a premium that tends the indicators on the positive side.
Fluctuations between -15% (slightly bullish) and + 15% (somewhat bearish) are typical and are expected. It is very unusual for a market to stay flat or near zero most of the time.
In order to, Traders should keep an eye out for more extreme situations as they may indicate that market makers are unwilling to take risks on either side.
In the graph above we see that since November 5th Options traders are unwilling to take positions that are exposed to a rally. Hence, traders will view this as a very bullish situation.
Option sales / purchase relationship
By measuring whether there is more activity via call or put options, a trader can determine general market sentiment. In general, call options are used in bullish strategies while put options are used in bearish strategies.
A sell / buy ratio of 0.70 indicates that the open interest in put options is 30% behind the more bullish call options and therefore the mood is bullish.
Vice versa, An indicator of 1.20, favoring put options by 20%, can be considered bearish. It should be noted that the indicator aggregates the entire BTC options market including all calendar months.
In situations like those currently observed in the market, It is natural for investors to look down for protection as BTC surpasses $ 19,000, even though the sell / buy ratio is well below the 6 month average of 0.90. The current level of 0.64 shows that there is a lack of pessimism among professional traders.
Usually, These four key indicators have remained stable, especially considering the market has just taken a somewhat traumatic setback. when the price of BTC fell to $ 16,200.
With the price back over $ 19,500, Almost all investors want to know if Bitcoin is strong enough to break its all-time high this week.
From a derivatives trading perspective, nothing is stopping you.
The views and opinions expressed here are solely those of darer and do not necessarily reflect the views of Cointelegraph. Every investment and business move is associated with risks. You must do your own research when making a decision.