Options contracts tied to ether (ETH) worth $2.3 billion are set to expire on dominant crypto derivatives exchange Deribit this Friday. The market is currently witnessing a low spread between Deribit’s forward-looking 30-day implied volatility index for ether (ETH DVOL) and bitcoin (BTC DVOL). The negative spread, indicating relative ether stability, is a result of increased institutional interest in “overwriting” or selling ether call options. This dynamic has set the stage for significant market shifts around Friday’s expiry.
Overwriting is a practice of selling overvalued call options or bullish derivative bets, typically against long-term buy-and-hold positions. This generates additional income on top of spot market holdings. A call seller offers protection to the buyer from price rallies in return for fixed compensation. Since the beginning of the year, reflective overwriting flows have lowered ETH implied volatility (IV), which refers to traders’ expectations for price turbulence.
The June contracts are set to settle on Friday, and overwriters may roll over their positions. In other words, short positions expiring on Friday may be squared off and moved to the July or September expiry. This could lead to considerable changes in how IV is priced in the bitcoin and ether markets.
At press time, the ETH-BTC DVOL spread stood at -2.5, having hit a three-year low of -7.8 last week, according to data source Amberdata. A call option represents a bullish bet on the underlying asset, while a put represents a bearish bet.
While rollovers may influence the ETH-BTC DVOL spread, ether’s price is likely to remain around $1,800-$1,900, according to the over-the-counter liquidity network Paradigm. 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.
The overwriting trend may lead to notable shifts in volatility as participants consider rolling over their positions. Although it implies stability for ether, some may argue that the ease of overwriting could be a double-edged sword when volatility finally emerges.
As the market anticipates the expiry date, the effect of overwriting on ether’s price and market performance cannot be understated. However, potential shifts in volatility could ultimately determine the direction of the ether and bitcoin markets, with various pros and cons to consider.
Source: Coindesk
