Calm! Bitcoin options data says $ 18,500 is not a local high

In the early hours of today, the price of Bitcoin (BTC) peaked at $ 18,476 after an impressive 35% bull run that appears to have started in early September.

This amazing movement it was followed by a correction to $ 17,000, a natural pullback. This adjustment led some investors to question if the current setup looks like the high of $ 13,850 formed in July 2019.

BTC / USD pair in July 2019. Source: TradingView

In that opportunity, There was a 30% drop following a similarly sized rally, and then it took 14 months for Bitcoin to regain the $ 13,850 level. Coincidentally, there was a sudden big drop just after that local high, but the price eventually rallied and stabilized near $ 12,800.

If something similar happened this time, investors would expect a low of $ 13,000 for the current cycle. Apart from a sudden drop after a strong rally, What other indicators mimic the July 2019 price action?

The first step is to analyze the futures base indicator, which can be interpreted as investor optimism. The basis is also often referred to as the futures premium and measures the premium for longer-term futures contracts relative to current spot levels (traditional markets).

Fixed-month futures contracts are generally traded at a small premium, indicating that sellers are asking for more money to delay the settlement of the contract. In healthy markets, futures must be traded with an annualized premium of 5% or more, this situation is known as contango.

Annualized basis of 3-month Bitcoin futures in July 2019. Source: Skew

Excessive optimism may have occurred as the base indicator reached 20% on June 23. However, it maintained very healthy levels throughout the price correction in 2019.

The above chart can be interpreted as an absolute unwillingness to reduce long positions. This move occurred despite a sudden drop to $ 2,000 followed by a 30% correction from the high.

As strange as it may seem, not even the 30% drop after the high of $ 13,850 decreased the premium on futures contracts. The decline of the bullish generally has a massive impact on the base indicator.

We fast-forward to the current scenario, and there is not a single case of excessive optimism by the same metric.

Annualized basis of 3-month Bitcoin futures in November 2020. Source: Skew

The chart above shows that the base indicator quickly fell below 10% just after the formation of the high of $ 18,500. To further differentiate the current price action from that of July 2019, two weeks before the price peak, the futures premium stood at 0%, a clear sign that investors were having bearish sentiment.

This time, the lowest level in the last two weeks has been 7%. This means that investors have maintained positive expectations for the past few months, while in July 2019, the market saw an intense, fast and optimistic run.

Options traders weren’t so bullish ahead of the rally

To better analyze current market sentiment, investors should also take into account the spreads of the options market. The 25% delta tilt indicator will go to the negative side when call options (neutral or bullish) are more expensive than similar put options. This metric generally ranges from -20% to + 20% and reflects current market sentiment.

25% incline of the delta of 3-month Bitcoin options in June 2019. Source: Skew

Interestingly, Bitcoin experienced an 80% bull run in the three weeks leading up to the high of $ 13,850, but the options market seemed unprepared for this. At that time, upside protection using call options was trading at the same premium as bearish put options.

Therefore, we can conclude that the options traders were pricing with the same probability that there was a strong market swing in either direction. This situation is the case recently, as shown by the indicator of the 25% slope of the delta.

25% incline of the 3-month Bitcoin options delta in November 2020. Source: Skew

During the last 30 days, This indicator of options market sentiment has been signaling bullish. Traders are unwilling to sell protection to the upside, causing the tilt indicator to hit an unprecedented -30%.

As professional traders are demanding a hefty premium for bullish call options, we can conclude that a sudden dumping of the price is far from their expectations.

Investors should not make decisions based solely on the interpretation of a single indicator that shows that option traders are currently overly optimistic. These traders might have been caught off guard and are therefore not eager to open short positions.

There are large differences between the July 2019 high and the current market high based on futures and options data. This indicates that there is no indication that a 30% drop will occur in the next few days.

The views and opinions expressed here are solely those of the autor and do not necessarily reflect the views of Cointelegraph. Every investment and business move involves risks, you must do your own research when making a decision.

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