Crypto markets are bracing 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 from Bybit and Block Scholes.
This expiration event is shaping up to be one of the biggest in 2024, but traders remain surprisingly moderate in their volatility expectations.
Implied market volatility remains moderate despite the significant volume of expiring contracts. Over the past two weeks, the realized volatility of BTC and ETH has increased, driven by sharp swings in spot prices.
The spot price of BTC fluctuated between $92,000 and $106,000, while that of ETH rose from $3,300 to $4,000. However, the valuation of short-term options has not responded with a comparable increase in implied volatility.
This divergence is particularly evident in the term volatility structures. ETH experienced a reversal, signaling high expectations for near-term volatility. In contrast, BTC’s maturity structure suggests traders expect more long-term turbulence, leaving short-term volatility relatively subdued.
Financing rates reflect market regimes
Perpetual swap funding rates reflected the volatile behavior of the spot market, passing through three distinct regimes in December.d
Earlier this month, extremely high funding rates supported the bullish sentiment. By mid-December, rates stabilized, only to dip intermittently into 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, reacting to moderate spot price movement 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 calls dominating open interest. Many of these call options, placed earlier in the year at lower spot prices, will likely expire in the money.
Additionally, recent activity has focused on puts, reflecting traders’ efforts to hedge against the risk of near-term declines in spot prices. This trend highlights a cautious approach as the market faces increased realized volatility.
Volume and holidays
Even though trading volumes are down slightly from December highs, there is no sign that traders are heading away for the holidays. Instead, they appear to be bracing for potential volatility as options expiration looms.
Over the past month, realized volatility has repeatedly exceeded implied volatility for short-term options, suggesting that the market has been slow to internalize the magnitude of recent spot price movements.
This dynamic left the term structure of volatility relatively stable, although short-term volatility peaked mid-week on December 21.
