Crypto markets are gearing up for a major moment, with more than $525 million worth of Bitcoin.Bitcoin) and Ethereum (ETH) options expire on Friday, December 27, according to the latest report report by bye bit and Block Scholes.
This expiration event is shaping up to be one of the biggest events of 2024, yet traders are surprisingly reserved in their expectations for volatility.
Implied market volatility remains muted despite a significant volume of contracts expiring. Over the past two weeks, marked volatility has increased in Bitcoin and Ethereum, driven by extreme price movements.
Bitcoin Cash has fluctuated between $92,000 and $106,000, while Ethereum has fluctuated between $3,300 and $4,000. However, short-term options pricing has not responded with a comparable increase in implied volatility.
This divergence is especially evident in the volatility term structures. Ethereum has experienced an inversion, indicating increased expectations of short-term volatility. In contrast, Bitcoin's term structure suggests that traders expect more volatility in the long term, relatively reducing short-term volatility.
Financing rates reflect market regimes
Capital rates on perpetual swaps reflect the erratic behavior of the cash market, which moved through three distinct regimes in December.
Earlier in the month, very high investment rates supported bullish sentiment. In mid-December, rates stabilized, but have fallen intermittently into negative territory over the past week, aligning with falling prices in the cash market.
These negative rates are significant because of their lack of correlation with dissolution events. Instead, they represent a cautious market that responds to momentary low price action rather than panic selling.
Meanwhile, open interest in BTC and ETH options remains flexible, even as the year draws to a close. Bitcoin options alone account for $360 million of expiring contracts, with call options dominating open interest. Many of these call options, which were placed earlier in the year at lower spot prices, are likely to expire in the money.
Additionally, recent activity has focused on put options, indicating traders are trying to hedge against short-term downside risk in cash prices. This trend indicates a cautious approach as the market is moving towards increasing real volatility.
Volume and holidays
While trading volume is down slightly from December's highs, there is little evidence that traders are pulling away for the holidays. Instead, they appear to be bracing for potential volatility as options near expiration.
Over the past month, realized volatility has repeatedly exceeded the implied volatility of short-term options, indicating that the market has been sluggish in price due to recent spot price volatility.
This dynamic has left the duration structure of volatility relatively stable, even with a spike in short-term volatility midweek on December 21st.
