Crypto markets are preparing for a pivotal time as more than $525,000,000 in Bitcoin (BTCEthereum (ETHAccording to recent reports, ) options are due to expire Friday, Dec. 27. report You can also read about how to get in touch with us. Bybit Block Scholes.
This is one of the biggest expiration events in 2024. However, traders’ expectations about volatility are surprising low.
The implied volatility of the market remains low despite a large number of contracts that are nearing their expiration. In the last two weeks, realized BTC volatility and ETH volatility have risen, driven by sharp price changes.
BTC’s price fluctuated between $92,000 to $106,000 while ETH saw a change from $3,300 up to $4,000. Short-term option pricing, however, has not seen a similar increase in implied volatility.
The volatility term structure is a good example of this divergence. ETH experienced an inversion signaling increased short-term volatility expectations. BTC’s structure of terms suggests that traders are expecting more volatility in the longer term. Short-term volatility is relatively low.
Funding rates are a reflection of market conditions
In December, the funding rates of perpetual swaps were a reflection of the choppy spot market. They changed from three different regimes.
In the beginning of the month, high funding rates fueled a bullish mood. Rates stabilized by mid-December and then dipped intermittently to negative territory over the last week. This coincided with price declines on the spot market.
The negative funding rates stand out for their absence of correlation to liquidation events. They indicate that the market is cautious, and not panicked, as they are responding to a subdued price movement.
Even as we approach the end of the year, BTC and ETH open interest remains strong. BTC options account for $360 millions of the expiring contracts. Call options dominate open interest. Most of the call options that were purchased earlier in the year, at lower spot rates, are likely to expire in money.
Recent activity is also concentrated on put options. This reflects traders’ attempts to hedge against the short-term downside risks in spot prices. This trend reflects a cautious attitude as the market navigates through heightened realized volatility.
Volume and Holidays
Although trading volumes are down slightly compared to December’s peak, there is little evidence that traders will be taking a break for the holidays. As the expiration of options nears, traders appear to be bracing themselves for possible volatility.
The market has not been able to accurately price recent spot price swings.
The volatility term structure has remained relatively flat despite the fact that short-term volatility spiked in midweek on December 21.
