Today’s Ether (ETH) 10% dump caused its annualized futures basis to adjust after flirting with extremely optimistic territory. The basis indicator compares futures contracts price to the current level at regular spot exchanges.
Healthy markets usually display a 5% to 15% annualized basis, in a situation known as contango. On the other hand, a negative basis (futures premium) usually occurs during heavily bearish markets.
ETH 1-month futures annualized basis. Source: Skew
The above chart shows an annualized basis on Ether futures climbing above 20% yesterday, which is usually unsustainable. The same movement happened on August 13 as Ether broke the $420 resistance but failed to sustain such a level less than a week later.
A basis indicator above 20% is not necessarily a pre-crash alert, but rather shows extremely leveraged future contracts buyers. This overconfidence only poses a greater risk if the market recedes below $420.
This is not a magic number, but the level when the basis exceeded 15%, indicating higher leverage use from buyers.
Sellers were not liquidated
Those betting on $500 should be pleased knowing that open interest has been increasing, despite a 35% thirty-day rally up to $480. Those betting on an adverse price move have long been liquidated after such a strong upswing.
Ether futures open interest in USD terms. Source: Skew
Ether futures open interest peaked at $1.7 billion on August 14, and is currently sitting at $1.5 billion. This indicates futures contracts sellers are mostly doing arbitrage, aiming to grab the basis premium mentioned above.
Cash and carry trades consist of buying the underlying asset and simultaneously selling futures contracts. This is a fully hedged trade, so there’s no way to get liquidated due to leverage. Therefore, such a continued increase in open interest despite a strong rally is a positive indicator.
Ether options have also reached alarming levels
Most options market indicators are backward-looking, thereby heavily affected by Ether’s substantial hike over the past month. On the other hand, the options 25% delta skew indicator is unaffected by previous market conditions.
Although it could seem complicated, and indeed the mathematics behind it might be, analyzing such an indicator is relatively straightforward.
A positive 25% delta skew indicates put (sell) options cost more than similar call (buy) options, thus an indication of bearish sentiment. On the other hand, a negative skew suggests bullishness.
Ether (ETH) 1-month options 25% delta skew. Source: Skew
Similar to the futures markets basis indicator, we have recently experienced extreme optimism over Ether options trading. The 1-month 25% delta skew briefly touched -22%, near its lowest level ever recorded.
Currently it stands at -12%, showing that options traders are demanding more money to protect further a price upside.
That would not be the case had those market makers and savvy players been betting on a sideways market or a short-term correction.
Volume at spot exchanges is also bullish
Volumes on regular spot exchanges provide insight into whether a trend is gaining or losing steam.
Even though it is natural for volume to recede after an intense hike, it should sustain a healthy level to support Ether levels above $420.
Ether price and 5-day average volume chart. Source: Messari
The above data shows just how daily volume surpassed $800 million as Ether broke the $250 price resistance. The current daily average volume above $1 billion seems to show no sign of weakness.
On-chain data corroborates the bullish trend
Ethereum transactions per day. Source: Etherscan
The above chart is a telling sign of real use cases backing the 230% price increase over the past five months. Traders tend to take short-term views by analyzing hourly charts and sometimes forget to study broader data.
The current 1.1 million transactions per day is quite near the January 2018 peak, whereas the Ether price remains some 65% below its $1,386 high.
Although initially worrisome as both future basis and options 25% delta skew curbed excessive optimism, both indicators remained at very healthy levels.
Meanwhile, traded volumes on regular spot exchanges are currently two times higher than the $500 million daily average seen between April and July.
On-chain data is also supportive of derivatives optimism, suggesting that a $500 ETH price is closer than $400.
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