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Cryptocurrency markets are preparing for a pivotal moment with over $525 million worth of Bitcoin (Bitcoin) and Ethereum (Ethereum) The options are set to expire on Friday, December 27, according to the latest news a report by Bybit And Block-Scholes.
This expiration event is shaping up to be one of the biggest of 2024, yet traders remain surprisingly restrained in their volatility expectations.
Implied volatility in the market remains weak despite the large volume of contracts approaching expiration. Over the past two weeks, realized volatility in Bitcoin and Ethereum has risen, driven by sharp spot price movements.
The spot price of BTC oscillated between $92,000 and $106,000, while ETH saw a swing from $3,300 to $4,000. However, short-term options pricing did not respond with a corresponding rise in implied volatility.
This difference is particularly evident in the volatility term structures. ETH has seen a reversal, indicating higher volatility expectations in the short term. In contrast, BTC’s term structure suggests that traders expect more disruption in the longer term, leaving short-term volatility relatively subdued.
Financing rates reflect market regulations
Perpetual swap financing rates reflected the volatile behavior of the spot market, as it moved through three distinct regimes in December.
Early in the month, significantly higher funding rates supported bullish sentiment. By mid-December, interest rates had stabilized, falling intermittently into negative territory last week, in line with price declines in the spot market.
These negative financing rates have the advantage of being uncorrelated with liquidation events. Instead, they indicate a cautious market, responding to weak spot price movement rather than panic selling.
Meanwhile, open interest in Bitcoin and Ethereum options remains resilient, even as the end of the year approaches. BTC options alone account for $360 million in expiring contracts, with call options dominating open interest. Many of these call options, placed earlier in the year at low spot prices, will likely expire in the money.
Moreover, recent activity has been concentrated in call options, reflecting traders’ efforts to hedge against short-term downside risks in spot prices. This trend highlights a cautious approach as the market navigates increasing realized volatility.
Size and holidays
While trading volumes have tapered off slightly from December highs, there is little evidence to suggest that traders are turning away from the holidays. Instead, they appear to be bracing for potential volatility as options expiration approaches.
Over the past month, realized volatilities have repeatedly exceeded the implied volatilities of short-term options, suggesting that the market has been slow to price in the magnitude of recent spot price fluctuations.
This dynamic has left the volatility term structure relatively stable, even as short-term volatility rose mid-week on December 21.
