First Mover Americas: Bitcoin’s Implied Volatility Ticks Higher, S&P 500 Sees Death Cross

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By Omkar Godbole

Bitcoin’s implied volatility is creeping higher ahead of the Federal Reserve’s rate decision, perhaps a sign of traders setting up options positions that would benefit from price swings in the leading cryptocurrency.

The annualized one-month implied volatility, investors’ expectations for price turbulence over the next four weeks, has increased from 68% to 77% this month, according to data provided by Skew. The three- and six-month gauges have gone up from roughly 67% to 74%.

More importantly, the three-month implied volatility has popped back above the backward-looking realized volatility, having underperformed the same earlier this month.

An uptick in implied volatility indicates increased demand for options – hedging instruments. A call option gives the purchaser the right but not the obligation to buy the underlying asset at a predetermined price on or before a specific date. A put option represents the right to sell.

Seasoned traders use options to hedge bullish or bearish risks and often buy both to capture returns from any macro data release or binary-event-related volatility. Buying both call and put options represents a bullish view on volatility.

Several orders for straddles and strangles have crossed the tape in recent days, according to over-the-counter tech platform Paradigm’s Telegram-based tracker of crypto options flows. Straddle and strangle strategies involve buying both call and put options and allow investors to profit from big moves in the underlying asset.

The Fed is likely to raise rates by 25 basis points on Wednesday. And while the markets may have priced in the liftoff, potential hawkish guidance could inject volatility into the market, bringing gains to volatility buyers.

While implied volatility gauges have risen in the run-up to the Fed, overall, they are well below the highs seen in October and November.

Besides, the way options are priced suggests buying has been primarily concentrated in longer duration call options off late. Perhaps, these traders are hedging against the risk of a large move to the higher side over a three-month to one-year time horizon.

By Omkar Godbole

Daily chart of S&P 500, Wall Street’s bechmark index, shows a death cross, a bearish cross of the 50- and 200-day moving averages (MAs).

The long-term bearish indicator is accompanied by a head-and-shoulders breakdown, also a bearish pattern.

Bitcoin tends to move more or less in line with the stock markets.