Author: Omkar Godbole, CoinDesk; Translated by: Wuzhu, Golden Finance
summary
Short-term BTC options show a preference for call options, indicating optimism about the U.S. election on November 4.
S&P 500 options suggest otherwise, and some cryptocurrency traders have been “selling volatility,” according to data tracked by Block Scholes.
The idea that Bitcoin (BTC) typically moves in tandem with the S&P 500 is now widely accepted. However, this positive correlation may be tested in the run-up to the U.S. election as options market pricing points to a different trend.
According to data tracked by analytics platform Block Scholes, on Monday, Bitcoin options listed on major cryptocurrency exchange Deribit showed a clear bias (skewness) of short-term call options relative to put options, capturing the U.S. election and its results announced on November 8.
Meanwhile, short-term options tied to Wall Street's benchmark stock index, the S&P 500, showed a bias toward puts.
The relatively strong demand for Bitcoin call options suggests that traders expect upward volatility or price increases during the election. Call options offer buyers asymmetric upside, allowing entities to hedge or profit from price increases.
The bias toward S&P 500 put options indicates concerns about downside volatility, as put options protect against price declines. Note that index option biases typically show a bias toward put options for a variety of reasons, including portfolio managers hedging against tail risk.
However, Block Scholes CEO and founder Eamonn Gashier said the divergence between Bitcoin and S&P 500 options is “prepared for big things.”
“Either the strong positive correlation between bitcoin and the S&P 500 is about to break down and turn negative, or one of these markets is mispriced. What’s exciting is the uncertainty — are we about to see bitcoin decouple from stocks, or are traders in one market about to be caught off guard?” Gashier told CoinDesk.
Some Crypto Traders Are “Selling Volatility”
It may seem counterintuitive to bet on muted price action or falling volatility ahead of a binary event like the U.S. election, but some traders are doing just that.
According to data tracked by crypto liquidity provider Wintermute, implied volatility (IV) for election expiry options trading on Deribit has fallen from 62% annualized to 55% on Nov. 8. This is a sign that traders are developing volatility-bearing strategies. IV is affected by demand for options.
“Traders are selling volatility through strangles, straddles and volatility spreads. Most of the positions are around $65,000,” Jake Ostrovskis, an over-the-counter trader at Wintermute, told CoinDesk.
“All of these trades benefit from reduced volatility – so betting on realized implied volatility, as these events have done in recent history,” Ostrovskis added.
Selling straddles and strangles means selling calls and puts, betting that the price of the underlying asset will remain largely range-bound. The seller collects a premium, which is retained if the price remains in a narrow range until expiration. However, this is a risky strategy better suited for savvy traders with a good supply of capital, as losses can quickly mount and far exceed the premium received if volatility spikes.
According to the Financial Times, the heated presidential campaign has traders of the S&P 500 and the CBOE Volatility Index (VIX) betting on a surge in volatility through VIX call options.
