The cryptocurrency markets are on the cusp of a significant event as more than $525 million worth of Bitcoin (BTC) and Ethereum (ETH) options are scheduled to expire on Friday, Dec. 27. This impending expiration is anticipated to be one of the largest in 2024, but traders seem to be maintaining a sense of calm despite the potential for increased volatility.
According to a recent report by Bybit and Block Scholes, the market’s implied volatility remains subdued even as the volume of contracts nearing expiration is substantial. While BTC and ETH have experienced heightened realized volatility in recent weeks due to sharp price movements, short-term options pricing has not reflected a corresponding increase in implied volatility.
An interesting observation is the volatility term structures of BTC and ETH options. While ETH has seen an inversion, indicating expectations of elevated short-term volatility, BTC’s term structure suggests that traders are anticipating more turbulence in the long term, keeping short-term volatility relatively low.
Funding rates across perpetual swaps have mirrored the choppy behavior of the spot market, transitioning through different regimes in December. From exuberantly high funding rates early in the month to stability in mid-December and intermittent dips into negative territory recently, funding rates reflect the market’s cautious response to subdued spot price action rather than panic selling.
Despite the approaching year-end, open interest in BTC and ETH options remains robust, with BTC options alone representing $360 million of the expiring contracts. Call options dominate open interest, with many likely to expire in the money based on lower spot prices earlier in the year. Recent activity has also shown a focus on put options, indicating traders’ efforts to hedge against short-term downside risk amidst heightened realized volatility.
While trading volumes have slightly decreased from December’s peaks, there is no indication that traders are stepping away for the holidays. Instead, they seem to be preparing for potential volatility as the options expiration deadline approaches. Realized volatility has consistently exceeded implied volatility for short-term options in the past month, suggesting that the market has been slow to fully price in recent spot price swings.
Overall, the cryptocurrency markets are poised for a crucial moment with the upcoming expiration of BTC and ETH options. Traders are navigating through a period of heightened volatility and uncertainty, with cautious strategies in place to manage potential risks.