Bitcoin options assume a low probability of prices touching record highs by this year-end as volatility expectations continue to surround the market.
In line with data source Skew, options traders are pricing an 8% chance of the crypto rising to an all-time high of over $64k by 31st Dec. The probability of Bitcoin [BTC] trading in 6 figures is solely 2%.
Some observers might feel the market is underpricing the probability, but the numbers require to be read in context with the recent price fluctuations.
Bitcoin has more than halved since peaking above $64k in mid-April. Bull run sentiment has weakened so much that the annualized rolling 3-month basis in BTC futures listed on Binance fell to zero earlier this week. Futures listed on Binance, the world’s leading cryptocurrency exchange by trading volume, traded at a premium of nearly 40% within the height of the bull run.
The 6-month implied volatility, or investors’ expectations for price volatility, has dropped to a more than the two-month low of 80% at the reporting time, having peaked at 122% on 17th May, in line with Skew data.
Additionally, this implies investors expect the price consolidation to continue for a while. The cryptocurrency has mostly traded in the $30k to $40k range for the past two months, barring occasional dips to $29k.
Moreover, the options market probabilities have a positive correlation with implied volatility: The greater the volatility, the higher the odds of bitcoin hitting certain levels.
A word of caution, however. As the name suggests, options probabilities are probabilities and can change very rapidly along with changing market conditions.
Additionally, for the primary 10 months of last year, the market consistently signaled a lower-than 10% chance of BTC dropping below $20k by 31st Dec. Nevertheless the cryptocurrency broke above the key level in mid-December and ended the year somewhere near $29k.
The options probabilities are calculated using the Black-Scholes formula using metrics such as call option prices, strike prices, the price of the underlying asset, the “risk-free” interest rate on investments as United States Treasuries along with the time to maturation.
Options are derivative contracts that offer the purchaser the right, but not the obligation, to trade the underlying asset at a pre-chosen price on or before a specific date. A call option represents a right to purchase, a put option the right to sell.