In June 2022, following the collapse of Terra, demand for puts increased and implied volatility collapsed, similar to the recent crypto bear market after the collapse of FTX.
Both options market performance and implied volatility reflect a strong correlation with the collapse of the Terra blockchain. These factors can provide important insights into crypto market behavior, such as when to anticipate sudden price movements, when to place stop-loss orders, and when to deposit sufficient margin for leveraged trading.
Data provided by Glassnode shows that Bitcoin’s 7-day implied volatility dropped to an annualized 50% in December, reaching the same level as implied volatility after the Terra collapse. The chart below presents this information.
The Luna collapse was marked by an increase in implied volatility. This was seen as a sign of market fear and uncertainty over cryptocurrency prices, causing the price of the underlying asset to fall.
The options market has become a way for analysts to gauge potential price movements by judging the level of fear and incoming volatility through higher premiums.
If the market rises, the option will be exercised and the investor will earn a profit based on the strike price of the option. Conversely, if the market falls, the option will not be exercised and the investor will not lose any money.
Another strategy that can be used to prevent market declines is to buy put options. A put option gives an investor the right to sell a security at a predetermined price.
If the market goes down, investors can exercise their option to sell the security at a predetermined price to make 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 market sentiment for a particular asset. As shown in the recent Option 25 chart above, bearish sentiment forces traders to sell the underlying asset.
Conversely, when sentiment is bullish, the options market is more likely to push the underlying asset price higher. Conversely, when analysts record high implied volatility, the market expects more volatile price movements and vice versa.
Overall, both options market performance and implied volatility provide key insights into the The behavior of the crypto markets, especially when it comes to forecasting sharp declines. However, volatility fluctuations cannot be used to indicate bullish or bearish trends as this metric only reflects uncertainty and doubt among traders.