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Most investors who follow Bitcoin have recently heard of the increasing influence of Bitcoin futures and options markets on Bitcoin prices. The same goes for the price fluctuations caused by OKEx and Huobi exchange’s liquidation.
Considering that the derivatives market now plays a greater role in Bitcoin price fluctuations, it is becoming more and more necessary to evaluate some key indicators used by professional traders to measure market activity.
Although evaluating futures and options contracts can be quite complicated, the average retail investor can still benefit from knowing how to correctly interpret futures premiums, funding rates, option skew, and put/call ratios.
The futures premium measures the price of long-term futures contracts relative to the current spot prices in the traditional market. It can be seen as a relative reflection of investor optimism, and the trading price of futures is often slightly higher than that of spot exchanges.
In a healthy market, the premium for two-month futures should be between 0.8% and 2.3%. Any number above this range is extremely optimistic. At the same time, the absence of a premium on futures indicates that investors are bearish.
The past week has been like a roller coaster, the futures premium index reached 2% on November 24, and the price of Bitcoin also reached a peak of $19,434.
Although the current premium is 1.1%, but more importantly, despite a 14% drop, this indicator remains above 0.8%. Generally speaking, investors consider this level to be bullish. Yesterday we could see the Bitcoin price hit a new high of over $19,900.
Perpetual Futures Contract Funding Rate
Funding fees for perpetual futures contracts are usually charged every eight hours. The funding rate ensures that there is no risk of transaction imbalance. Even if the positions of the buyer and the seller are always the same, the leverage may be different.
When the buyer (long) uses more leverage, the funding rate will be positive. Therefore, these buyers will pay higher fees. This issue is especially important during bull market periods, because bull market periods usually require stronger bulls.
A funding rate of over 2% per week means extreme optimism. This level is acceptable during market upswings, but if Bitcoin prices are in a sideways or downtrend, this level is problematic.
In this case, the buyer’s high leverage will bring a lot of liquidation possibilities during unexpected price drops.
Please note that despite the recent bull market, the weekly funding rate remains below 2%. This data shows that although traders are optimistic, buyers are not over-leveraged. Similarly, during the $1,400 drop on November 26, this indicator remained at a healthy and neutral level.
Unlike futures contracts, options are divided into two parts. The buy option allows the buyer to buy bitcoin at a fixed price on the expiry date. On the other hand, the seller of options will be obliged to sell Bitcoin.
The 25% delta skew of options compares equivalent call (buy) and put (sell) options. If the cost of using call options to prevent price increases is higher, the skew indicator will become a negative range. When investors are short, the situation is just the opposite, leading to premium trading of put options, leading to a positive shift in the skew indicator.
Oscillations between -15% (slightly bullish) and +15% (slightly bearish) are typical and expected. It is very unusual for most markets to remain flat or close to zero most of the time.
Therefore, traders should monitor more extreme situations because they may indicate that the market maker is unwilling to take the risk of either party.
The above chart shows that since November 5th, option traders are reluctant to establish short positions. Therefore, traders will consider this to be a very bullish situation.
Put/call option ratio
By measuring whether more transactions are carried out by buying options or selling options, the sentiment of the entire market can be judged. Generally speaking, call options are used for call strategies, and put options are used for put strategies.
The ratio of put options to call options is 0.70, indicating that the open position of put options is 30% less than the call options, so it is called.
In contrast, the ratio of put options to call options is 1.2, indicating that there are 20% more open put options than call options, which can be considered a put. One thing to note is that this indicator integrates the entire Bitcoin options market.
In the current situation in the market, investors will naturally seek downside protection because Bitcoin exceeds $19,000, even though the put/call ratio is much lower than its six-month average of 0.90. The current 0.64 level shows that professional traders are not pessimistic.
Overall, these four key indicators have remained stable, especially considering that the market has just suffered a traumatic correction and the price of Bitcoin has fallen to $16,200.
With the price of Bitcoin once again breaking through $19,500, almost all investors are wondering whether Bitcoin has enough power to break its all-time high this week.
From the perspective of derivatives trading, nothing can stop it.