In June 2022, following the Terra collapse, the demand for puts rose while implied volatility collapsed, the same as in the recent crypto bear market after the fall of FTX.
The performance of the options market and implied volatility both reflected a strong correlation to the collapse of the Terra blockchain. These elements can provide important insights into the behavior of the crypto market, including when to expect sudden price fluctuations, place stop-loss orders, or deposit sufficient margin for leveraged trading.
Data provided by Glassnode shows Bitcoin’s 7-days implied volatility dropped to an annualized 50% in December, attaining the same levels as the implied volatility after Terra collapse. The chart below represents this information:
The Luna collapse was characterized by an increase in implied volatility. This was seen as a sign of the market’s fear and uncertainty with cryptocurrency prices, which drove the prices of the underlying assets down.
The options market became a way for analysts to measure potential price swings by determining the level of fear and incoming volatility through higher premiums.
If the market goes up, the option will be exercised, and the investor will make a profit based on the option’s strike price. Conversely, if the market goes down, the option will not be exercised, and the investor will not lose any money.
Another strategy that can be used to protect against a decline in the market is buying a put option. A put option gives the investor the right to sell a security at a predetermined price.
If the market goes down, the investor can exercise their option to sell the security at the predetermined price, resulting in a profit. Conversely, if the market goes up, the option will not be exercised, and the investor will not lose any money.
Options market performance is a measure of the market’s sentiment towards a particular asset. Bearish sentiment forces traders to sell off the underlying assets, as shown on the recent Options 25 chart above.
Conversely, when the sentiment is bullish, the options market will be more likely to bid up the underlying asset price. Conversely, when the analyst records high implied volatility, the market anticipates a more volatile price movement and vice versa.
Overall, the performance of the options market and implied volatility both provide essential insights into the behavior of the crypto market, especially when it comes to predicting sudden drops. However, the metric fails to denote either a bullish or bearish trend using volatility fluctuations because it only reflects uncertainty and doubt among traders.