Most investors who follow Bitcoin have recently heard of the growing impact of Bitcoin (BTC) futures and options on Bitcoin price. The same applies to price fluctuations caused by liquidations on the OKEx and Huobi exchanges.
With derivatives markets now playing a much bigger role in Bitcoin price volatility, there is an increasing need to review some of the key metrics that professional traders use to measure activity in the markets.
While reviewing futures and options contracts can be quite complicated, the average retailer can still benefit from knowing how to correctly interpret the futures premium, funding rate, option offset, and put-call ratio.
The futures premium measures how expensive longer-term futures contracts are in current locations in traditional markets. It can be viewed as a relative expression of investor optimism, and fixed calendar futures typically trade at a slight premium over regular spot exchanges.
The 2 month futures should trade at a premium of 0.8% to 2.3% in healthy markets, and any number above this range indicates extreme optimism. The lack of a futures premium suggests a bear market.
The past week has been a roller coaster ride and the indicator hit 2% on November 24th while Bitcoin price peaked at $ 19,434.
While the premium is currently at 1.1%, more importantly, the indicator was above 0.8% despite a 14% drop in prices. In general, investors view this level as bullish, and today we can see that Bitcoin price has made a new high above $ 19,900.
Perpetual Futures Funding Rate
Perpetual contracts, also known as inverse swaps, typically charge an embedded interest rate every eight hours. The funding rates ensure that there are no imbalances in exchange rate risk. Although the open interest of buyers and sellers is the same at all times, leverage can vary.
If buyers (longs) demand more leverage, the financing rate is positive. Hence, these buyers are the ones who pay the fees. This problem is especially true during bull run periods when there is typically more long demand.
Sustained rates above 2% per week lead to extreme optimism. This level is acceptable during market rallies, but problematic when BTC price is sideways or in a downtrend.
In such situations, high leverage for buyers harbors the potential for large liquidations with surprising price drops.
Note that despite the recent upward trend, it has managed to keep the weekly funding rate below 2%. This data shows that while traders are optimistic, buyers have not been overfunded. Similarly, the indicator held healthy neutral levels during the $ 1,400 drop on November 26th.
Unlike futures contracts, options are divided into two segments. Call (Buy) options allow the buyer to purchase BTC at a fixed price on the expiration date. On the other hand, the seller of the instrument is obliged to carry out the BTC sale.
The delta offset of 25% compares equivalent call (buy) and put (sell) options side by side. If the protection against price increases through call options is more expensive, the skew indicator shifts into negative territory. The opposite is true when investors are bearish and put options are trading at a premium, which shifts the skew indicators positively.
Oscillations between -15% (slightly bullish) to + 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.
Hence, traders should monitor more extreme situations as they may indicate that market makers are unwilling to take risks on either side.
The graph above shows that since November 5th, options traders have not been ready to take positions that are exposed to an uptrend. Hence, traders will view this as a very bullish situation.
Put-call ratio for options
By measuring whether there is more activity through call (buy) options or put (sell) options, general market sentiment can be measured. Generally, call options are used for bullish strategies, while put options are used for bearish strategies.
A put-to-call ratio of 0.70 indicates that the open positions of put options are 30% behind the more bullish calls and are therefore bullish.
In contrast, an indicator of 1.20 favors put options by 20%, which can be considered bearish. It should be noted that the indicator aggregates the entire BTC options market including all calendar months.
In situations like the one currently seen in the market, it is only natural for investors to seek downside protection as BTC tops $ 19,000 even though the put / call 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.
Overall, these four key indicators have stabilized, especially considering the market just took a somewhat traumatic retreat when BTC price fell to a retest of $ 16,200.
With the price back 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 here are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trading step is associated with risks. You should do your own research when making a decision.