Understanding the Impact of Options Expiration on Crypto Markets
In the world of crypto trading, options expiration events can have a significant impact on market dynamics. As we approach a major expiration event with over $525 million in Bitcoin (BTC) and Ethereum (ETH) options set to expire, it’s crucial to analyze the current market conditions and trader sentiment.
Market Expectations and Implied Volatility
- Despite the upcoming expiration event, traders are showing restrained expectations for volatility in the market.
- Realized volatility in BTC and ETH has seen a surge in the past two weeks due to sharp spot price movements.
- While BTC’s spot price has fluctuated between $92,000 and $106,000, ETH has experienced swings from $3,300 to $4,000.
- Short-term options pricing has not reflected the increased volatility seen in spot prices, leading to a divergence in volatility term structures.
Impact on Funding Rates and Market Regimes
Funding rates across perpetual swaps have transitioned through different market regimes in December, reflecting the choppy behavior of the spot market.
- Exuberantly high funding rates early in the month supported bullish sentiment, which later stabilized and even turned negative at times.
- Negative funding rates indicate a cautious market reacting to subdued spot price action rather than panic selling.
Open Interest and Options Activity
- Open interest in BTC and ETH options remains strong as the year-end approaches, with BTC options alone accounting for $360 million of expiring contracts.
- Call options dominate open interest, with many expected to expire in the money due to lower spot prices at the time of placement.
- Recent activity has focused on put options as traders hedge against short-term downside risk amidst heightened realized volatility.
Volume Trends and Market Response
While trading volumes have slightly tapered from December’s peaks, traders are not stepping away for the holidays but preparing for potential volatility.
- Realized volatility has consistently outpaced implied volatility for short-term options, indicating a slow response to recent spot price movements.
- The volatility term structure remains relatively flat, despite spikes in short-term volatility, signaling a cautious market approach.
