The cryptocurrency markets are on the edge of a significant event as more than $525 million in Bitcoin (BTC) and Ethereum (ETH) options are set to expire on Friday, Dec. 27. This expiration event is expected to be one of the largest in 2024, but traders are not anticipating high levels of volatility.
Despite the substantial volume of contracts nearing expiration, the market’s implied volatility remains relatively low. In the past two weeks, BTC and ETH have experienced increased realized volatility due to sharp price movements. BTC has fluctuated 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 reflected this increase in volatility.
The volatility term structures for BTC and ETH are showing different patterns. ETH has an inverted term structure, indicating elevated short-term volatility expectations. On the other hand, BTC’s term structure suggests that traders anticipate more turbulence in the long term, leading to subdued short-term volatility.
Funding rates across perpetual swaps have mirrored the choppy behavior of the spot market, transitioning through three different regimes in December. Negative funding rates in the past week suggest a cautious market sentiment in response to subdued spot price action.
Open interest in BTC and ETH options remains strong, with BTC options accounting for $360 million of the expiring contracts. Call options dominate the open interest, with many of them expected to expire in the money. Recent activity has shown a focus on put options as traders hedge against short-term downside risk.
While trading volumes have slightly decreased from December’s peaks, there is no indication that traders are stepping away for the holidays. Instead, they seem to be preparing for potential volatility as the options expiration approaches. Realized volatility has consistently outpaced implied volatility for short-term options, indicating that the market has been slow to adjust to recent price swings.
Overall, the crypto markets are heading towards a crucial moment with the upcoming options expiration, and traders are closely monitoring the situation for any signs of increased volatility.