Traders brace for volatility as $525M in crypto options set expire on Dec. 27

The crypto markets are gearing up for a pivotal moment as over $525 million in Bitcoin (BTC) and Ethereum (ETH) options are set to expire on Friday, Dec. 27, according to a recent report by Bybit and Block Scholes.

This expiration event is shaping up to be one of the largest in 2024, yet traders remain surprisingly restrained in their expectations for volatility.

The market’s implied volatility remains muted despite the substantial volume of contracts nearing expiration. Over the past two weeks, realized volatility in BTC and ETH has surged, driven by sharp spot price movements. 

BTC’s spot price has oscillated 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 responded with a comparable uptick in implied volatility.

This divergence is particularly evident in the volatility term structures. ETH has experienced an inversion, signaling elevated short-term volatility expectations. In contrast, BTC’s term structure suggests traders expect more turbulence in the long term, leaving short-term volatility relatively subdued.

Funding rates reflect market regimes

Funding rates across perpetual swaps have mirrored the spot market’s choppy behavior, transitioning through three distinct regimes in December.d

Early in the month, exuberantly high funding rates supported bullish sentiment. By mid-December, rates stabilized, only to dip intermittently into negative territory in the past week, aligning with price pullbacks in the spot market .

These negative funding rates are notable for their lack of correlation with liquidation events. Instead, they indicate a cautious market, responding to subdued spot price action rather than panic selling.

Meanwhile, open interest in BTC and ETH options remains resilient, even as the year-end approaches. BTC options alone account for $360 million of the expiring contracts, with call options dominating open interest. Many of these call options, placed earlier in the…