Whale Drives Ether-Bitcoin Volatility Spread Lower Ahead of Options Expiry

Deribit, a major crypto derivatives exchange, is set to experience a significant market shift this Friday, when $2.3 billion worth of options contracts tied to Ether (ETH) expire. The market is currently witnessing a low spread between Deribit’s forward-looking 30-day implied volatility index for ETH and Bitcoin (BTC) due to increased institutional interest in “overwriting” or selling ETH call options. Overwriting is popular amongst investors as it generates additional income on top of spot market holdings by selling or writing overvalued call options or bullish derivative bets typically against long-term buy-and-hold positions.

Since the beginning of the year, the market has seen overselling flows in ETH, which have lowered ETH implied volatility, a measure of traders’ expectations for price turbulence. However, the dynamic has created a scenario where the implied volatility index for ETH is now lower than that of BTC. As a result, the spread between ETH-BTC DVOL hit a three-year low last week at -7.8, and at press time, the spread stood at -2.5, suggesting that ether is relatively stable.

As the expiry date of June contracts approaches, overwriters may roll over their positions, meaning short positions expiring on Friday may be squared off and moved to the July or September expiry. This could cause significant shifts in how the implied volatility index is priced in the BTC and ETH markets.

“ETH has witnessed substantial institutional selling activity [in call options], earning a trader the moniker of the ‘ETH overwriter’ aka an ETH volatility selling whale! Remarkably, this has resulted in a scenario where DVOL in ETH is lower than that of BTC,” said Deribit’s Chief Risk Officer Shaun Fernando.

Despite the potential market shifts, Ether’s price is likely to stay around $1,800-$1,900, according to over-the-counter liquidity network Paradigm. “In terms of ETH dealer gamma heading into expiry, we predict $1,800-$1,900 strikes to be a magnet for spot, predominantly because dealers have largely got long due to previously discussed overwriter flows,” Paradigm said in its market update.

Being long gamma means holding buy (long) positions in options. When market makers are long gamma, they buy low and sell high to keep their overall exposure market neutral. The hedging often ends up keeping prices rangebound.