The crypto markets are gearing up for a pivotal moment as more than $525 million worth of Bitcoin (BTC) and Ethereum (ETH) options are set to expire on Friday, December 27, according to a recent report. report by Bybit and Block Scholes.
This expiration event looks set to be one of the biggest in 2024, yet traders remain surprisingly cautious in their expectations for volatility.
Implied market volatility remains subdued despite the significant number of contracts nearing expiry. Over the past two weeks, realized volatility in BTC and ETH has soared, driven by sharp spot price movements.
The spot price of BTC has fluctuated between $92,000 and $106,000, while ETH has seen a swing from $3,300 to $4,000. However, short-term option pricing has not responded with a similar increase in implied volatility.
This difference is especially evident in the volatility term structures. ETH has experienced an inversion, indicating increased near-term volatility expectations. In contrast, BTC’s term structure suggests that traders expect more turbulence in the long term, keeping short-term volatility relatively muted.
The financing rates reflect the market regime
Funding rates for perpetual swaps reflected the choppy behavior of the spot market, which experienced three different regimes in December.d
At the start of the month, exuberant financing rates supported bullish sentiment. Interest rates stabilized in mid-December before intermittently entering negative territory over the past week, in line with price declines in the spot market.
These negative funding rates are notable for their lack of correlation with liquidation events. Instead, they indicate a cautious market, one that responds to moderate spot price action rather than panic selling.
Meanwhile, open interest in BTC and ETH options remains resilient even as the end of the year approaches. BTC options alone account for $360 million of expiring contracts, with call options dominating open interest. Many of these call options, placed earlier this year at lower spot prices, are likely to expire in-the-money.
In addition, recent activity has focused on put options, reflecting traders’ efforts to hedge against short-term downside risk in spot prices. This trend emphasizes a cautious approach as the market faces increased realized volatility.
Scope and holidays
While trading volumes have declined somewhat from December peaks, there is little evidence of traders pulling back for the holidays. Instead, they appear to be bracing for potential volatility as the options’ expiration date approaches.
Over the past month, realized volatility has repeatedly exceeded implied volatility for short-term options, indicating that the market has been slow to price in the magnitude of recent spot price swings.
These dynamics have kept the volatility term structure relatively flat, even as short-term volatility peaked mid-week on December 21.