Traders Seize Opportunities as Implied Volatility Takes a Dip
Bitcoin enthusiasts are capitalizing on the current dip in Bitcoin [BTC] options, finding them attractively priced for bullish maneuvers. Options, as derivative contracts, confer the right to buy or sell the underlying asset at a predetermined price on a future date. A call option facilitates profit or hedging against price surges, while a put option provides a counterbalance.
Traders identify options as economical when implied volatility, a pivotal factor in determining their prices, dips below the long-term average or the asset’s realized volatility. Implied volatility signifies the expected one standard deviation range of the asset’s price movement over a year, exhibiting a tendency to revert to the mean. On the other hand, realized volatility represents the price fluctuations that have already occurred.
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Bitcoin implied volatility (IV)
With the recent introduction of spot ETFs in the U.S., Bitcoin’s implied volatility (IV) experienced a peak, subsequently falling below realized volatility. This shift has triggered a surge in demand for calls at $45,000 and $46,000 strikes during North American trading hours, as reported by Paradigm, an over-the-counter institutional cryptocurrency trading network.
Paradigm observed substantial buying of Feb $44k straddles and outright call purchases in the $45k/$46k range. Given the prevailing scenario of BTC implied volatility trading significantly below realized volatility. This move aligns with the anticipation of a robust rebound in both spot prices and volatility.
Bitcoin Price and implied volatility
The term “outright call buying” indicates that these calls were likely standalone trades, signaling a bet on a resurgence of upward price volatility in Bitcoin rather than forming part of a complex strategy. Since the beginning of 2024, there has been a predominantly positive correlation between bitcoin’s price and implied volatility.
In the realm of options, a straddle emerges as a non-directional strategy involving the simultaneous acquisition of call and put options at the same strike price. This strategy aims to capitalize on an anticipated surge in implied volatility and the subsequent escalation in options prices.
Bitcoin has experienced a 15% decline since the debut of the ETF on Jan. 11, briefly dipping below $41,000 late Thursday. Despite this, traders remain optimistic, leveraging the current market conditions to make strategic moves in anticipation of a Bitcoin resurgence.
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