CME options still suggest no rally

The CME (Chicago Mercantile Exchange) is the largest futures and options exchange in the world, although when it comes to Bitcoin many of these derivatives trades happen on crypto exchanges. 

What is certain, however, is that institutional speculators prefer CME over crypto exchanges to take short-term positions on the price of BTC. 

CME: The possible Bitcoin rally

By analyzing Bitcoin options trading on the CME, CF Benchmarks states that the chances of a short-term price rally for BTC still seem decidedly low. 

CF Benchmarks is a company within the Kraken group, the second largest American crypto exchange, and besides dealing with analysis, it mainly focuses on indices on digital assets. 

Last month they launched the CF Bitcoin Volatility Index, which measures the implied volatility of BTC price options at the CME.

For example, at this moment the value of the CF Bitcoin Volatility Index Settlement Rate (BVXS) is just below 59.8 points, which is higher than the 54.5 points on May 8th, but still significantly lower than the annual peak of 89.1 points on March 11th. 

The analysts at CF Benchmarks point out that the implied volatility for out-of-the-money (OTM) put options with short expiration has been higher than the implied volatility for call options after the release of inflation data. 

The fact is that although the inflation data have been good, they are not yet sufficient to rule out the possibility that the Fed’s monetary policy remains very restrictive for a long time. 

Regarding the price of Bitcoin, this means that investors are still convinced of possible short-term declines to the point of being willing to pay a premium for protective put options. 

The difference between the implied volatility of OTM put options compared to that of call options is called the “volatility skew”, and at this moment it is still quite pronounced in short-term options. 

This indicates that speculators tend not to consider the beginning of a new rally likely in the coming days. 

Options on CME and possible price directions of Bitcoin

In this case, a higher implied volatility for put options, that is, those for buying, suggests that there is a majority of bearish speculators in this market, because it indicates that they are trying to profit from, or protect themselves from, the potential weakness of prices. 

Put options are derivative contracts that are used to protect against, or speculate on, price declines, while call options are used to protect against potential price increases. 

In particular, out-of-the-money (OTC) options are considered to be put options with strikes below the current market rate and call options above the spot market price. 

Instead, the measure of implied volatility is an estimate of the future volatility of the underlying asset based on current option prices, and it increases as demand increases.

Therefore, a higher implied volatility of OTM put options indicates a greater demand for these, compared to calls, which in turn indicates a greater propensity of investors to hedge against potential price declines. 

Although these data do not indicate certainties, because markets are not always right, the fact that they are extracted from the CME indicates that it is mainly institutional investors who are still reluctant to believe that a rally in the price of Bitcoin is possible in the short term. 

The short period

It should be noted, however, that in the crypto markets, “short term” refers to a period of a few days, or at most a week. 

Indeed, this discussion could change if we were to extend the analysis to the medium-short term, that is, a time frame of a few weeks or a month. 

The hypothesis circulating is that as early as next week things could start to change, although there is no certainty about it. 

So if in the short term there don’t seem to be favorable conditions for triggering a new rally, already starting from the next weeks such conditions could begin to change. 

It is important to remember that financial markets now move at very high speed, especially thanks to bots and algorithms that have reaction times of just a few milliseconds, so they could change their minds very quickly if the conditions of the crypto market were to start changing next week. 

Furthermore, the current period of price consolidation of Bitcoin does not exclude a return to $70,000 at all, but this may not be enough to interrupt it. 

CF Benchmarks

An interesting chart published by CF Benchmarks is the three-dimensional one of the implied volatilities of Bitcoin options, called the volatility surface. 

This chart shows the implied volatilities for short and long-term BTC options, with different deltas (or degrees of sensitivity) to price changes. 

The chart shows that the distortion caused by the publication of the April inflation data in the USA was mainly on the OTM options with expiration between 20 and 40 days. Instead, moving to those with later expirations, the bias shifts in favor of bullish call options.

So according to CF Benchmarks analysts, institutional investors’ sentiment towards Bitcoin seems to be positive in the medium term, while still slightly negative in the short term. 

The transition from short to medium-short term could indeed lead to a turning point, with a reduction in bearish sentiment and a relatively short shift towards a bullish one.