Cryptocurrency exchange Deribit is the absolute leader in Bitcoin (BTC) options markets, and on Nov. 24, the 25% delta bias indicator noted that sentiment among professional traders was turning "more bearish overall."
We have seen the 25 Delta put bias move from around 0% to almost 10-15% to expiration since the beginning of November, implying an overall more bearish sentiment.
Premiums for downside protection are getting more and more expensive.
In the short term, this expiration has a maximum pain of $ 58k. https://t.co/jhpT1riX3g- Deribit (@DeribitExchange) November 24, 2021
Bitcoin price appears to be following a descending channel since November 9, so a "bearish" signal could be a reflection of the 22% drop from the all-time high of $ 69,000.
The 25% delta bias compares the call (buy) and put (sell) options side by side. It will turn positive when the premium for hedging put options is higher than similar risk calls, indicating bearish sentiment.
The reverse occurs when market makers lean higher, and this brings the 25% delta bias indicator into the negative range.
Readings between negative 8% and positive 8% are generally considered neutral, so Deribit's analysis is correct when it claims that a considerable shift toward "fear" occurred on November 23. However, that movement slowed on November 26 as the indicator is now at 8%, it no longer supports the bearish stance of traders.
What happened in the futures markets?
To confirm if this movement was specific to that instrument, the futures markets should also be analyzed.
The futures premium, also known as the "base rate," measures the difference between longer-term futures contracts and current levels of the spot market. An annualized premium of 5% to 15% is expected in healthy markets, a situation known as contango.
This price gap is due to sellers demanding more money to hold liquidation longer, and a red alert appears each time this indicator fades or turns negative, known as "backwardation."
Unlike the options delta bias of 25%, which has changed to "fear", the main risk metric for futures was relatively stable at 11% between November 16 and 25. Despite a small drop, its current 9% is neutral for futures markets and not even close to bearish.
Traders mainly use call options
One can only guess why professional traders and market makers using the Bitcoin options markets are overcharging for put options. Perhaps they fear imminent risk after a US Senate Committee. information on the issuance of stablecoins November 23.
That same day, the board of governors of the Federal Reserve System announced the work in a series of "policy sprints" designed to address regulatory clarity in the crypto industry. Administrative agencies will potentially adjust standards for compliance and enforcement of existing laws and regulations.
Still, that doesn't explain why these uncertainties were not reflected in the Bitcoin futures markets. Therefore, one must wonder whether the 25% bias indicator should be ignored in that case.
The December 31 Bitcoin options expiration has 60% of the current open interest, for a total of $ 13.4 billion of aggregate exposure. As the chart above shows, there is practically no interest in put options above $ 60,000.
Considering that the call options are 145% larger than the protection put options as of December 31, one should not worry too much about how market makers are pricing these instruments. Therefore, the delta bias of 25% should not be of much importance at this point despite the bearish alert from Deribit.
The views and opinions expressed here are solely those of the Author and do not necessarily reflect the views of Cointelegraph. Every investment and trade movement involves risk. You should do your own research when making a decision.
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