The crypto markets are gearing up for a pivotal moment as over $525 million in Bitcoin (BTC) and Ethereum (ETH) options are set to expire on Friday, Dec. 27, according to a recent report by Bybit and Block Scholes.
This expiration event is shaping up to be one of the largest in 2024, yet traders remain surprisingly restrained in their expectations for volatility.
The market’s implied volatility remains muted despite the substantial volume of contracts nearing expiration. Over the past two weeks, realized volatility in BTC and ETH has surged, driven by sharp spot price movements.
BTC’s spot price has oscillated between $92,000 and $106,000, while ETH has seen a swing from $3,300 to $4,000. However, short-term options pricing has not responded with a comparable uptick in implied volatility.
This divergence is particularly evident in the volatility term structures. ETH has experienced an inversion, signaling elevated short-term volatility expectations. In contrast, BTC’s term structure suggests traders expect more turbulence in the long term, leaving short-term volatility relatively subdued.
Funding rates reflect market regimes
Funding rates across perpetual swaps have mirrored the spot market’s choppy behavior, transitioning through three distinct regimes in December.d
Early in the month, exuberantly high funding rates supported bullish sentiment. By mid-December, rates stabilized, only to dip intermittently into negative territory in the past week, aligning with price pullbacks in the spot market .
These negative funding rates are notable for their lack of correlation with liquidation events. Instead, they indicate a cautious market, responding to subdued spot price action rather than panic selling.
Meanwhile, open interest in BTC and ETH options remains resilient, even as the year-end approaches. BTC options alone account for $360 million of the expiring contracts, with call options dominating open interest. Many of these call options, placed earlier in the year at lower spot prices, will likely expire in the money.
Furthermore, recent activity has been concentrated in put options, reflecting traders’ efforts to hedge against short-term downside risk in spot prices. This trend highlights a cautious approach as the market navigates heightened realized volatility.
Volume and holidays
While trading volumes have tapered slightly from December’s peaks, there’s little evidence to suggest traders are stepping away for the holidays. Instead, they appear to be bracing for potential volatility as the options expiration looms.
Over the past month, realized volatility has repeatedly outpaced implied volatility for short-term options, suggesting the market has been slow to price in the magnitude of recent spot price swings.
This dynamic has left the volatility term structure relatively flat, even as short-term volatility spiked midweek on Dec. 21.
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