Bitcoin Bets Surge Amidst Sliding Implied Volatility

• Bitcoin Options Gain Traction Amidst Price Dips
• Understanding Volatility in Options Pricing
• Bitcoin's Implied Volatility and Launch of Spot ETFs
• Interpretation of Paradigm's Data
• Straddles and Their Role
• Bitcoin's Performance Post-ETF Debut

Bitcoin Options Gain Traction Amidst Price Dips

Bitcoin$42,260 -0.64% options appear to be undervalued currently, and some traders are using this opportunity to increase their bullish positions. These options are derivative contracts, providing the buyer the privilege to purchase or sell the underlying asset at a set price in the future. There are two types of contracts: a call option, which provides the right to purchase and can be used by traders to benefit or safeguard against price surges; and a put option, which does the opposite.

Understanding Volatility in Options Pricing

Traders typically see options as undervalued when implied volatility, a vital factor in options pricing, falls under its average long-term value or the asset's actual volatility. Implied volatility refers to a one standard deviation range of the expected fluctuation of the underlying asset's price over a year, and generally returns to the mean. On the other hand, realized volatility is a measure of price movements that have already occurred.

Bitcoin's Implied Volatility and Launch of Spot ETFs

Bitcoin's implied volatility (IV) reached a peak with the introduction of spot ETFs in the U.S. last week. Since then, it has fallen below actual volatility, sparking demand for calls at strikes $45,000 and $46,000 during Thursday's North American trading, as per data from the over-the-counter institutional cryptocurrency trading network Paradigm.

Interpretation of Paradigm's Data

Paradigm reported a significant purchase of Feb $44k straddles and some outright call buying at the $45k/$46k strikes. The term 'outright call buying' suggests that the calls bought were likely standalone trades, wagering on a resurgence in bitcoin's price volatility, rather than being part of a complex strategy. Since the beginning of 2023, there appears to be a mostly positive correlation between bitcoin's price and its implied volatility.

Straddles and Their Role

A straddle is a neutral strategy involving the simultaneous acquisition of call and put options at an equivalent strike price. Its purpose is to profit from an anticipated surge in implied volatility, resulting in a subsequent increase in options prices.

Bitcoin's Performance Post-ETF Debut

Since the ETF's launch on January 11, Bitcoin has experienced a decline of over 15%, with prices briefly dipping below $41,000 late on Thursday.

Edited by Jonathan Stoker