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Rising Bullish Sentiment in Bitcoin as Implied Volatility Declines

Traders are increasing their bullish bets on Bitcoin (BTC) as options for the cryptocurrency appear to be undervalued, with some purchasing call options at strike prices of $45,000 and $46,000 during Thursday’s U.S. trading hours, as reported by over-the-counter institutional cryptocurrency trading network Paradigm.

Bitcoin options allow buyers to acquire the right to buy or sell the underlying asset at a predetermined price on a future date. Calls, which give the right to buy, are utilized by traders to profit from or hedge against price increases, contrasting with put options that serve the opposite purpose.

Traders often perceive options as cheap when implied volatility, a key factor influencing options prices, falls below its long-term average or below the asset’s realized volatility. Implied volatility represents the one standard deviation range of expected price movements of the underlying asset over a year and tends to revert to the mean. Realized volatility, on the other hand, reflects the price movements that have already occurred.

Bitcoin’s implied volatility peaked with the introduction of spot ETFs in the U.S. last week and has since decreased below realized volatility. This has triggered an uptick in demand for call options at strike prices of $45,000 and $46,000 during Thursday’s North American trading hours, according to Paradigm.

Paradigm noted, “We saw a large buyer of Feb $44k straddles and some outright call buying in the $45k /$46k strikes. BTC implied volatility now trades well under-realized volatility, so we are not surprised to see Paradigm customers playing for a sharp rally back in spot and vol.”

The term “outright call buying” suggests that the purchased calls were likely standalone trades, indicating a bet on renewed upward price volatility in Bitcoin rather than being part of a more complex strategy. Since early 2023, there has been a predominantly positive correlation between Bitcoin’s price and implied volatility.

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