Bitcoin dips but options market holds steady

Last week, the crypto market experienced a massive sell-off that sent Bitcoin’s price down to as low as $25,000. The sharp market movement ended several months of unprecedented calmness in the crypto market.

Previous CryptoSlate analysis pinpointed the derivatives market as the primary catalyst for the aggressive sell-off. The futures market saw a significant deleveraging event, resulting in the closure of over $2.5 billion worth of perpetual futures contracts closed out in a single day.

On the other hand, the options market remained remarkably resilient during Bitcoin’s price decline. Glassnode data showed a consistent open interest for both call and put options, indicating that these instruments were largely unaffected by the market volatility.

open interest options puts vs calls ytd — Graph showing the open interest for Bitcoin puts and calls YTD (Source: Glassnode)

However, it wasn’t all smooth sailing for options. One notable shift the market saw was the aggressive repricing of volatility.

Implied volatility, a market metric that predicts the potential magnitude of asset price fluctuations based on options prices, has been unprecedentedly low throughout the summer. Implied volatility is an important metric to monitor as it provides insights into future price fluctuations, influencing trading strategies.

The tranquility in implied volatility was wiped out last week during Bitcoin’s price slump. Bitcoin’s drop to $25,000 caused the implied volatility for options set to expire in a week to nearly double. Specifically, it surged from 22.15% on August 12 to 52.35% on August 18.

options implied volatility 3mo — Graph showing the implied volatility for Bitcoin options from May 21 to Aug. 22, 2023 (Source: Glassnode)

Another metric that underwent a significant shift was the 25 delta skew for options. This skew, which measures the difference in implied volatility between out-of-the-money puts and calls, leaped from -15.8% to 16.9% for options expiring in one week. A positive skew indicates that puts are more expensive than calls, suggesting a higher demand for downside protection and bearish sentiment.

options 25 delta skew 3mo — Graph showing the options 25 delta skew from May 21 to Aug. 22, 2023 (Source: Glassnode)

While the crypto market’s recent turbulence rattled many sectors, the options market remained a beacon of stability, at least in terms of open interest. However, the sharp adjustments in implied volatility and the 25 delta skew underscore the market’s heightened sense of uncertainty and caution.

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