A recent report from Bybit and Block Scholes shows that the crypto markets are preparing for a momentous event. More than $525 million worth of Bitcoin (BTC) or Ethereum (ETH) option contracts are due to expire Friday, December 27.
The expiration of this contract is expected to be the biggest in 2024. However, traders are still surprisingly conservative in terms of their volatility expectations.
The market’s implied volatility remains muted despite the substantial volume of contracts nearing expiration. The realized volatility of BTC, ETH, and other cryptocurrencies has soared in the past couple weeks due to sharp price fluctuations.
BTC’s spot price has oscillated between $92,000 and $106,000, while ETH has seen a swing from $3,300 to $4,000. The implied volatility of short-term option pricing, however, hasn’t increased in a similar way.
It is most evident when you look at the term structures of volatility. ETH is experiencing an inversion which signals elevated expectations for short-term volatility. In contrast, BTC’s term structure suggests traders expect more turbulence in the long term, leaving short-term volatility relatively subdued.
Market regimes reflect funding rates
Funding rates across perpetual swaps have mirrored the spot market’s choppy behavior, transitioning through three distinct regimes in December.d
In the beginning of December, high funding rates boosted bullish sentiment. Rates stabilized by mid-December and then slipped intermittently to negative territory over the last week. This coincided with a price drop in the spot markets.
This negative funding rate is notable because it does not correlate with any liquidation event. These rates are not indicative of panic sales, but rather a market that is reacted to by a more cautious response.
Even as we approach the end of the year, BTC and ETH open interest remains strong. BTC options account for 360 million dollars of contracts expiring, and call options are the dominant open interest. Most of the call options that were purchased earlier this year, at lower spot rates, are likely to expire with a profit.
Furthermore, recent activity has been concentrated in put options, reflecting traders’ efforts to hedge against short-term downside risk in spot prices. The trend shows a prudent approach to the market as it navigates increased realized volatility.
Holidays and Volume
While trading volumes have tapered slightly from December’s peaks, there’s little evidence to suggest traders are stepping away for the holidays. As the expiration of options nears, traders appear to have been preparing themselves for possible volatility.
In the last month, the realized volatility of short-term options has consistently outpaced the implied volatility, suggesting that the market is still slow in pricing the recent price fluctuations.
Even though short-term volatility spiked in midweek December 21, the term structure of volatility has been relatively flat.
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