21 Dec 2021

Medium-term far out the money option flows foreshadowing bitcoin sell-offs?

Before both crashes on May 19th and December 4th, the 6-month 25D Skew flipped from negative to positive. This suggests that signals from medium-term options could be a useful directional indicator in the future.
Options foreshadowing moves.svg
Source: Skew, Tradingview
The 25-delta skew shows the difference between the implied volatility for put and call options at the same maturity. A positive skew signals a higher demand for put options than call options. When the skew is negative, the demand for call options is higher than for put options.The 25-delta skew has historically tended to be negative for bitcoin options, especially for options with longer expiries that are far out of the money. While bitcoin options usually have a negative skew, most other financial assets have a positive skew and are short volatility. An example is the S&P 500. At the end of November, the 25D skew for 6-month call options on bitcoin reached positive territories for the first time since June. The last time it flipped from negative to positive was on May 17th, right before the May 19th crash when the bitcoin price dropped 40% intraday. Similar dynamics unfolded this time around. In the days following the skew flipping from negative to positive, bitcoin saw a significant sell-off. The 6-month 25D skew has since fallen back to neutral terrain, signaling a balanced demand between puts and calls. Still, it's essential to be aware that after the skew flipped from negative to positive in May, the bitcoin price continued downwards for two months. When demand for longer-dated far out of the money puts increases and outpaces the demand for calls at the same maturity, it seems wise to be cautious in the market.
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