As the pivotal quarterly settlement approaches this Friday, options contracts worth $2.3 billion tied to Ether (ETH) are set to expire on dominant crypto derivatives exchange Deribit. The market is witnessing a low spread between Deribit’s forward-looking 30-day implied volatility index for Ether (ETH DVOL) and Bitcoin (BTC DVOL), with the negative spread indicating relative Ether stability. According to Deribit Chief Risk Officer Shaun Fernando, this is due to an increased institutional interest in overwriting or selling Ether call options.
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 (implied volatility index similar to VIX) in ETH is lower than that of BTC, said Fernando. As these substantial positions near their expiration, it could lead to captivating shifts in volatility as participants consider rolling over their positions.
At press time, the ETH-BTC DVOL spread stood at -2.5, having hit a three-year low of -7.8 last week. While rollovers may influence the ETH-BTC DVOL spread, 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.