Riot Platforms (NASDAQ:RIOT), a blockchain mining company, may not have dominated the options market during last Friday’s trading session, but its significance in the world of cryptocurrencies cannot be ignored. Despite not being a direct cryptocurrency investment, RIOT, with its substantial $2.03 billion market capitalization, wields significant influence as one of the leading miners in the industry.
While the derivatives market often offers valuable insights into the strategies employed by institutional investors and smart money, the options landscape for cryptocurrencies is not as developed as that for U.S. equities. Liquidity remains a challenge in this nascent space, making the analysis of derivatives activity in publicly traded blockchain companies a potentially more reliable indicator of institutional sentiment.
Broadly speaking, the cryptocurrency market could use a positive catalyst in the near future. The crypto market tends to thrive on directional movements, whether it’s sharp upward or downward swings. However, since August 18, trading sentiment has been relatively flat, a departure from the usual volatility.
Furthermore, Bloomberg reported that crypto trading volume hit its lowest point of the year in August. While similar declines have occurred before, notably late last year, leading to subsequent rebounds in both volume and prices, past performance doesn’t guarantee future results—especially in the midst of a challenging post-pandemic economic recovery.
Before making your next cryptocurrency trade, it’s worth exploring what the options market reveals about RIOT stock.
RIOT Stock and Its Options Activity in Focus
Although RIOT stock didn’t stand out as an exceptional option on Friday, its presence in the crypto ecosystem commands attention. Following the close on September 8, the total options volume reached 93,867 contracts, with an open interest of 781,786 contracts. The change in volume compared to the one-month average was a modest 4.06%.
Breaking down the transactions, call volume amounted to 56,890 contracts, while put volume reached 36,977 contracts. This resulted in a put/call volume ratio of 0.65. Additionally, the put/call open interest ratio stood at 0.56. While these numbers might suggest a bullish outlook, investors should exercise caution.
Examining the volatility smile chart from Fintel, which displays implied volatility (IV) at various strike prices of RIOT stock options, a pattern emerges. At the $11 strike price, IV sits at a low of 0.88, closely matching RIOT’s Friday closing price of $10.95. Moving towards out-of-the-money (OTM) options to the right, IV gradually rises to 1.46 at the $24 strike. This suggests a growing interest in longer-term bullish positions.
Conversely, as we move towards deep-in-the-money (ITM) options to the left, IV spikes to 2.19 at the $2.50 strike. This increase in IV at both ends of the volatility smile indicates that traders are recognizing the tail risk associated with cryptocurrencies. When the decentralized asset market corrects, it often does so dramatically.
Another aspect to consider is that with elevated IV at both ends, sophisticated traders are incentivized to sell options to capture the rich premiums. Data on options flow, focusing on significant trades likely made by institutions, shows substantial volumes of both sold puts and calls.
In summary, while retail traders may be making directional bets, institutional players seem to be capitalizing on the enthusiasm in the options market.
Analysts Express Optimism with Caution
Currently, Wall Street analysts unanimously rate RIOT stock as a strong buy, comprising six strong buy recommendations, one moderate buy, and one hold. Notably, no sell ratings have been issued.
The median price target stands at $18.61, implying a 70% increase from Friday’s closing price. The highest target is set at $24, indicating a potential 119% upside. However, the lowest target is a concerning $6, suggesting a potential 45% loss. Given these divergent opinions, RIOT stock represents a high-risk proposition.
In other words, if you choose to invest in Riot, it’s advisable to employ sophisticated options and strategies to navigate the market. Otherwise, you may find yourself at a disadvantage when facing institutional investors leveraging the elevated IV.
Regarding the broader crypto sector, the outlook appears challenging for bulls. With households under financial strain and policymakers contemplating future interest rate hikes, a cautious and skeptical approach may be the wisest course of action.
Featured Image: Freepik
