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With the volatility on the cryptocurrency market, more traders chose to hedge their positions via options contracts. But with the current call/put ratio, some inexperienced investors might receive the wrong signal about the current state of the market.
How traders utilize options
Options contracts are a high volatility asset that might give traders a major return if bought for the right price, but professional traders and investors do not ever use them to trade. The main purpose of options is to hedge your main position on the market.
By using put (sell) options, traders can hedge their long positions on the market. Whenever the price of an asset swiftly retraces and a correction begins, the price of their options contract will rise exponentially and cover any losses from the long position.
If an asset moves in the planned direction, traders can simply leave the option and just lose their contract fee, which is usually significantly lower than the size of the covered position.
Why it might be a good signal
With open interest increasing on put options, it might be a signal of increasing hedging volumes on the market. Usually, a large number of hedged positions is a sign of a healthy market.
Bitcoin has been showing an increase in overall volatility after reaching a new ATH and then rapidly retracing back under $60,000. Due to the volatility increase, some traders chose to safeguard their unrealized positions by using options contracts, taking profits if a flash crash happens and then reopening their positions for a lower price, which will give the market an initial boost for a new rally.
Vladislav Sopov