Although blockchain mining enterprise Riot Platforms (RIOT) wasn’t the most remarkable options play for last Friday’s market session, it’s unavoidable that much attention has been paid on RIOT stock. While it’s obviously not a direct cryptocurrency investment, as one of the biggest miners – currently sporting a $2.03 billion market capitalization – Riot commands massive influence.
Further, while the derivatives market generally provides a great read on the possible strategies being deployed by the smart money and institutional investors, the options space for cryptos is far less fleshed out than it is for U.S. equities. For example, the liquidity just isn’t quite there yet. Thus, analyzing the derivatives arena for publicly traded blockchain companies may give a better read on smart money/institutional sentiment.
Broadly speaking, the virtual currency space likely needs an upside catalyst soon. While I hesitate to use the term “desperate,” it’s an unavoidable thought. Usually, cryptos love directional mobility – either sharp moves up or down. Sideways consolidation is just not part of the digital asset market’s modus operandi. However, since Aug. 18, trading sentiment has been flat.
In addition, Bloomberg pointed out that crypto trading volume slumped to the lowest level of the year in August. To be fair, crypto volume has fallen off sharply before – most notably late last year – prior to volume and price rebounding robustly. Still, history isn’t guaranteed to repeat, especially amid a difficult post-pandemic economic recovery process.
So, before you pull the trigger on your next crypto trade, let’s see what the options market has to say about RIOT stock.
All Eyes Turn to RIOT Stock and Its Options Activity
Again, while RIOT stock wasn’t anywhere close to being the most unusual option on Friday, its prominence in the crypto ecosystem warrants considerable attention. Following the Sept. 8 close, total options volume reached 93,867 contracts against open interest of 781,786. In terms of volume change, the delta between the Friday session and the trailing one-month average metric was only 4.06%.
In terms of transactional breakdown, call volume came out to 56,890 contracts while put volume landed at 36,977 contracts. On paper, this pairing yielded a put/call volume ratio of 0.65. Also, the put/call open interest ratio sits at 0.56. While a face-value reading would imply a bullish backdrop, investors need to be careful.
Turning to Fintel’s chart for volatility smile – which plots the implied volatility (IV) of RIOT stock options at various strike prices – investors will come across a dynamic that possibly implies a mixture of bullish long-term opportunity combined with tail risk mitigation:
At the $11 strike price, IV sits at a low of 0.88. Coincidentally, RIOT stock closed at $10.95 in the open market on Friday. From there, moving in the out-of-money (OTM) direction (i.e. to the right), IV eventually peaks at 1.46 at the $24 strike. That’s a steady rise in “demand” for OTM options, which may indicate longer-term optimism.
On the other hand, moving toward the deep in-the-money (ITM) direction (left), IV practically roars to a peak value of 2.19 at the $2.50 strike. A possible explanation for this dynamic is that traders recognize the tail risk (or black swan event) associated with cryptos. Indeed, when the decentralized asset market corrects, it often does so harshly.
Another factor to watch out for is that because IV is elevated at both ends of the volatility smile, sophisticated traders are incentivized to sell options to collect the rich premiums. Turning to options flow data – which filters for big block trades likely made by institutions – we find significant volume of both sold puts and calls.
Stated differently, while retail traders may be taking directional bets, the institutional players appear to be advantaging the enthusiasm.
Analysts Are Hopeful But Simultaneously Leery
At the moment, Wall Street analysts peg RIOT stock as a consensus strong buy. This assessment breaks down as six strong buys, one moderate buy and one hold. Importantly, no one has yet issued a “sell” rating.
Moreover, the median price target stands at $18.61, representing a 70% lift from Friday’s close. As well, the high-side target clocks in at $24, implying 119% upside potential. Still, the low target sits alarmingly at $6, reflecting a 45% loss. With the experts anticipating either rapturous delight or heartache with few in-betweens, RIOT stock represents a high-risk wager.
Put another way, if you do gamble on Riot, it’s better to do so deploying sophisticated options strategies. Otherwise, you’re going to risk getting eaten alive by the institutional folks taking advantage of the heightened IV.
As for implications for the crypto sector, it’s going to be tough backdrop for the bulls. With households stretched and policymakers possibly mulling future interest rate hikes, it’s probably best to adopt a cautious, even skeptical framework.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
