Options data tells us a fair bit about the sentiment in crypto markets and downside skew in ETH risk reversals suggests traders are betting on a lower ether price.
Ether, the second largest cryptocurrency by market capitalization lost more than 11% over the last seven days.
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Posted April 17, 2024 at 4:00 am EST.
It’s been a volatile week for the crypto market and the second largest cryptocurrency by market capitalization ether was one of the hardest hit digital assets, losing more than 11% over the last seven days.
In a note on Tuesday, crypto hedge fund QCP Capital noted that crypto markets are getting increasingly nervous as the downside skew in ether risk reversals, which is a hedging strategy used by traders to protect against unfavorable price moves, are sinking deeper to -20%.
7 day ETH skews hit 17%
in the options world, this is basically peak FEAR.Betting that the local bottom is in. pic.twitter.com/ckYERCSstV
— hansolar (@hansolar21) April 17, 2024
Volatility skew refers to the difference in implied volatility (or how much the market expects the price of an asset to move) for levels of options with different strike prices.
Risk reversal is an options strategy that traders use to take advantage of this volatility skew. They sell an out of the money put option and simultaneously buying an out of the money call option with the same expiration date to protect against downside risk.
“We expect this nervousness to persist as the Iran-Israeli conflict develops. The risk-off sentiment has been exacerbated by weakness in US equities too,” analysts at the firm said.
The analysts also observed that perpetual funding rates for altcoins was generally negative, meaning that long leveraged trades had been wiped out.
“Given the prevailing nervousness, we suggest picking bottoms very defensively by buying BTC or ETH at a significant discount to spot price,” they said.
Based on how price has moved in the past, the current volatility set up could see ether move sharply in either direction.
According to Zaheer Ebtikar, founder of crypto hedge fund Split Capital, more than half the open interest on altcoins worth $9 billion was erased last week, with the lowest altcoin to market cap ratio since September.
We always tell the people we work with, we buy and sell conditions, not price.
Crypto is the largest user of “public comps” so anytime we base an investment decision on anything outside of this, we’re doing hand-wavey nonsense.
Goodnight.
SC
— Zaheer (@SplitCapital) April 15, 2024
“Precisely why I’m betting on an ETH bounce despite a medium term bearish outlook. It’s a great proxy for the alt market, and honestly the only one if you use options. It’s not price that you should trade, it’s what goes on under the hood as Zaheer points out,” said another pseudonymous trader on X.
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