Cryptocurrency Derivatives Series: Bitcoin Technicals, Options Analytics And Hedging Strategy

Bitcoin price has bounced back again from the lows of $6,456 levels to the recent highs of $7,217 levels.

Technically, BTCUSD (at Coinbase) has formed hammer pattern candle at $6,658 levels (refer 1st chart).

This bullish pattern (Hammer) takes-off rallies above DMAs with bullish crossovers, for now, more rallies seem to be on the cards as both leading & lagging oscillators are in tandem with the current upswings.

Most importantly, the open interest recorded on CME BTC futures has been considerably risen by 50% over the last month. This is positive indicator for the derivative trader as the rising open interest along with the rising price is the healthy sign in the underlying market.

Skew diagrammatically emphasizes CME’s derivatives data accounted by the institutional exposure to Bitcoin via futures. The institutional positions have spiked from a negative 1,800 BTC position (short) in the last month to a positive 85 BTC (long) position until April 7th.

Moreover, the put-call ratio of BTC options is 0.71, it was risen to 1.53 level over the weekend (refer 2ndchart), that indicates buying obligations of the underlying security (i.e. bitcoin) if going to be significantly prompted.

The put/call ratio has been very conducive tool and effective measures of underlying market sentiment for the forecasting future market trend. The put-call ratio emphasizes the difference in trading volume between puts and calls. 

Usually, Put/Call ratio of below 0.7/0.8 has been perceived as a bullish indicator. The Put/Call ratio for Bitcoin Options is smack in the middle of that range suggesting that traders are poised for a price reversal.

Fundamentally, the upcoming block-halving event is perceived as a rough patch by quite a few options traders, in which the underlying bitcoin is set to incur regular drops and almost suffering on a regular basis. 

Although the bitcoin price has stabilized and attempting to create upside traction, minor dips are quite possible. But if you consider the broader perspective, from April'16, the BTC has spiked from $414 to the all-time highs of $19k, currently, trading at $ 7.4k mark, which is still 1,660% rallies. When this is the case with BTC, could we fairly criticise the performance of the pioneer cryptocurrency?

Contemplating all the above factors, needless to speculate anything on the trend, and hence, the long hedges were advocated in the past as well using CME BTC Futures. It is not prudent to count the chickens before they hatch, if we keep speculating on the next upside target and accumulate fresh bitcoins. Instead, we activated long hedges in this security at spot reference: $6,723. Levels. We, now, certainly uphold these long hedges using CME BTC contracts of May month deliveries. Courtesy: tradingview & skew