June 24 was an important date for the cryptocurrency market. On the first delivery day after the bear market started, more than 100,000 BTC options contracts and more than 1.1 million ETH options contracts were sent out. On the futures and options markets, the new quarterly contracts were also set up at the same time. Given that the spot market for cryptocurrency and the market for its derivatives are linked, the importance of this delivery may be called “exceptional” when the cryptocurrency market has gone through two shocks in a row.
In general, during the semi-annual delivery, the final delivery price should be close to the “max pain point price,” which is affected by how well the long and short sides play their game. But a number of shocks and the fact that interest rates kept going up in May and June had a big effect on the cryptocurrency market. Even though the short-term negative attitude has made this delivery’s maximum pain point a little lower, the actual delivery price is still a long way from the maximum pain point.
This happened because investors on the spot market sold a lot and closed out their positions. When investors in the spot market sell quickly, the effect of the derivatives market on the spot price tends to be lessened. This is another example of how “limited” liquidity is in the cryptoasset market.
On June 24, about 31.9 percent of all BTC options contracts that were open were delivered. This was a little less than at the same time last year. This information was based on the number of open contracts and the number of deliveries (35.9 percent ). Still, the total number of contracts (88,153) was much higher than the previous year.
On the other hand, the delivery volume of ETH options is only about 28.7% of all open interest in options contracts. This is down from 39.2% last year. Even so, the delivery scale is 1.6 times what it was a year ago.
It’s important to know that the open interest in ETH options has grown a lot since last year, more than doubling to more than 3.3 million contracts. Given how slow the cryptocurrency market is right now, changes in the ETH options market could have a big effect on the price of ETH.
If you look at changes in gamma exposure, you can see that changes in the ETH options market have already begun to have some effects on the price of ETH. To some extent, the spike in gamma exposure slowed down the wild selling on the spot market. One way that positive gamma exposure goes up quickly is when a lot of call options are bought and sold.
Before and after the crypto witching day, there were a number of records of buying call options in the ETH options trading order flow, especially in the block trading order flow. Many days in a row, the number of contracts bought was more than 100,000 per day. This caused the call/put ratio to go over 0.8 at one point.
To limit their risk, market makers who buy a lot of call options must buy spot or long futures. The long-term behavior of market makers and dealers finally caused the price of ETH to level off.
Since the crypto market has stabilized after the delivery, the mood on the market as a whole has improved to some degree. Before delivery, the premium on BTC and ETH futures with a delivery date of 2023q1 was close to 0.6 percent, or the spot price. But after delivery, when the market got better, the premium for BTC and ETH futures went up to more than 1 percent. But compared to what it used to be, the current premium amount is still very low.
This delivery did not make the cryptocurrency market less risk-averse in the medium- to long-term in terms of volatility. After the shocks in May and June, the implied volatility surface of both BTC and ETH options showed a large increase and inversion. This pattern didn’t change much after the delivery was done.
After a large-scale delivery, the short-term volatility should usually be less than the long-term volatility. But this time, the volatility surface inversion pattern is still going strong because people are still afraid of taking risks before and after the delivery.
The data on skewness also showed how the market reacted before and after delivery. Even though the short-term market has become more positive and is almost neutral after the delivery date, the medium-term and long-term markets are still very negative, and put options continue to trade at a significant premium to call options. The situation makes it likely that people will feel sad all through July.
The term structure of options also backs up the idea that people should avoid taking risks. Options that end in July still have a high Forward IV after the delivery date, so you have to think about the possibility of more volatility in July. The Fed’s decision on interest rates in July and the European Central Bank’s plan to raise rates are still putting a lot of pressure on the crypto asset market.
In short, the crypto market may stay weak in the short term. Most investors are being careful, and it’s hard for the macroeconomic data to support the recovery of cryptoasset values. But in the short term, it seems like long volatility is the best way to go. After delivery, cryptocurrency markets tend to have short periods of low volatility. However, because of the liquidity crisis, the effects of event shocks could greatly increase market volatility, while changes to the macroeconomic environment in July will offer significant potential gains for volatility bulls.
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