Bitcoin

A bull run on DeFi could surprise Ethereum options traders who are expecting a price of $ 400

The price of Ether (ETH) rose 14% from its low of $ 320 on September 6, but this month’s futures and options expiration is less than two weeks away. With the price still below $ 400, this begs the question of how confident derivatives traders are of a 9% rally at $ 400.

By analyzing the option pricing model, investors can easily conclude that traders set prices after a 34% probability that ether will hit $ 400 or more. The main problem with the Black Scholes option model, however, largely depends on the number of days until it expires.

The odds of winning for the same level of $ 400 for November 27th increases to 52%. No matter how optimistic investors are about the launch date of Ethereum 2.0 or the increasing use of Altcoin on decentralized financial platforms.

The volatility of Ethereum leaves room for surprises

A bull run on DeFi could surprise Ethereum options traders who are expecting a price of $ 400
A bull run on DeFi could surprise Ethereum options traders who are expecting a price of $ 400

Volatility is the main indicator of strong price fluctuations. although it does not derive any positive or negative direction.

Historical volatility only measures previous movements and is hardly influenced by the current market sentiment. On the other hand, The implied volatility is based solely on current market conditions.

ETH 3-month options implied volatility

Implied volatility of 3 month ether options. Source: Skew

The data above shows how Ether’s implied volatility started an uptrend in late July and is now slightly above 5% daily. While the volatility is not indicative of direction, an average daily movement of 5% will certainly result in a weekly gain of 10% in the world of opportunity.

In order to be able to assess more efficiently whether these 400-dollar options are still worthwhile for the next few months, a trader would have to look back.

Analyzing weekly movements over the past five months is a good place to start. as it captures a good number of recent real life examples.

ETH USD weekly

Weekly price of the ETH / USD pair. Source: Investing.com

Not only is a 10% weekly gain possible, it has occurred four times in the past five months. This does not override the Black Scholes option pricing model. First, we are almost two weeks away from the end of September. Second, we’ve had negative results for weeks over the same period.

It should be clear that cryptocurrencies have moderate to extreme volatility. Hence, no one should discount a 10% profit in two weeks due to the price of the options.

In mid-July, when the 3-month implied volatility was 3.5%, a 10% call option with 75 days to expire was trading at $ 19. At the time, this was equivalent to 8% of the price of USD 244 for ether futures.

Today’s similar call option for November 27 priced at $ 400 costs $ 53, which is 14% of the $ 372 price for Ether futures. The main reason for such an increase is that the implied volatility has increased to the current level of 5.2%.

This change prevents traders from building bullish positions with options. and this can give the false impression that the market has turned bearish.

The primary risk indicator for ether options remains bullish

Traders should be vigilant on the 25% slope of the Delta to gauge how today’s traders are trading after the recent 33% decline from the high of $ 485 on September 1st.

As long as the market is unwilling to take downside risks, The indicator shows a negative value. On the other hand, A positive slope of the delta of 25% indicates that traders are charging less premium (risk) for upside protection.

3-month options 25% delta offset

25% slope of the delta for 3 month options. Source: Skew

The graph above shows the long-term to short-term ratio of OKEx Ether contracts, which is currently at 0.96 while Binance is at 1.02. That number is corroborated by data for the 25% dip in the ether options, suggesting that recent over-optimism has subsided.

The best traders have lowered their positive expectations

When Ether broke the resistance at USD 340 in August, the optimism was immediately reflected in traders’ net long and short positions. That move seems to have subsided after the recent price correction, but the long-short ratio on major futures exchanges is far from bearish.

Ether concludes long / short ratio

Relationship Between Long-Term and Short-Term Ether Contracts. Source: Okex

The graph above shows the long-term to short-term ratio of OKEx Ether contracts, which is currently at 0.96 while Binance is at 1.02. That number is corroborated by data for the 25% dip in the ether options, suggesting that recent over-optimism has subsided.

Perhaps the odds are not in favor of $ 400 option holders for September 25, but the outlook certainly looks positive after DeFi tokens made a healthy 19% jump yesterday.

The views and opinions expressed here are solely those of author 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.

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