BlockScholes X Bybit Crypto Derivatives Analytics Report (Aug 21, 2024): Election Premium Prized in for Both Bitcoin and Ether

Key Highlights:

Our weekly crypto derivatives analytics report dives into the current state of crypto, macro events, and trading signals from spot trading volume and futures, options and perpetual contracts.

Despite a week of low volatility and sideways price action, the derivatives market has seen intriguing trading activity.

Bearish sentiment toward ETH relative to BTC has persisted, evident in the negative funding rate, at-the-money (ATM) volatility premium and strong skew toward out-of-the-money (OTM) puts, particularly for short-dated expirations.

However, both ETH and BTC volatility markets are pricing in a growing premium for the November 5, 2024 U.S. presidential election. This is reflected in a stronger skew toward OTM calls for expirations after the election, indicating increased bullishness.

Please check out some of the report’s highlights.

Futures Activities Muted in the Past Week

The recent period of low realized volatility in spot prices has had a predictable impact on perpetual swap activity. Both BTC and ETH have seen underwhelming trade volumes, and open interest has remained stubbornly below its near-all-time-highs, failing to recover from the sell-off that prompted traders to close positions.

A weekly pattern has also emerged, with trade volumes consistently lower on Sundays. This trend is broken only during periods of extreme market volatility, suggesting a seasonality in activity that’s disrupted during times of panic.

Options Factor in Election Premium

Our previous analysis highlighted a more bearish positioning in options with shorter-dated expirations. Examining the volatility smiles across different expiration dates provides further evidence of this trend.

Options expiring after the U.S. presidential election — specifically those expiring on December 27, 2024 and June 27, 2025 — exhibit a noticeably stronger skew toward OTM calls when compared to the bearish skew toward OTM puts observed in options expiring before November. This pattern is consistent across both BTC and ETH options, suggesting a bullish sentiment toward the future of crypto assets in general during the latter half of 2024.

Volatility Reverts to Normal Steep Shape

Volatility term structures have reverted to a "normal" steep shape, with short-dated volatility falling rapidly in response to the equally rapid decline in realized volatility. However, longer-dated tenors remain significantly elevated. This suggests that the market is beginning to price in a potential event risk associated with the November 5, 2024 U.S. presidential election. This event has emerged as a critical narrative that could drive price action soon.

Interestingly, we do not observe a similar event risk premium being priced in for either the Jackson Hole Symposium at the end of August or the FOMC meeting on September 12, 2024, both of which could influence risky asset performance in the very short term.

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