The number of ETH options hits a record high, and the crypto market may enter a period of high volatility

Key Takeaways

• Open interest in ETH options products hit a record high, and implied volatility hit a record low.

• Market neutral options trading is popular because traders are prepared for sudden volatility in either direction.

• The falling put/call ratio suggests that most traders believe Ethereum is about to rebound.

ETH options open interest hits all-time highs as market volatility reaches record lows. Market data further suggests that the current volatility trend is upward.

ETH Options and Betting on ETH Volatility

Open interest in ETH options hit a new all-time high of nearly $200 million. Just two months ago, open interest in ETH options surpassed its previous high.

Source: Skew

However, this time around, buying options is one of the most advantageous trades.

ETH implied volatility is at an all-time low, while realized volatility is hovering near yearly lows. Implied volatility is a variable determined by the Black Scholes option pricing formula, while realized volatility is the actual historical volatility.

Source: Skew

Low implied volatility suggests options are cheap. Traders take advantage of this by entering dual-legged options trades known as straddles and strangles.

Both strategies involve traders simultaneously purchasing call and put options with the same expiration date. A straddle is an options strategy that includes call and put options with the same strike price and expiration date; a straddle is an options strategy that includes call and put options with different strike prices but the same expiration date.

Both strategies are market neutral, meaning they profit if the price of the underlying asset breaks out to the upside or downside. The ultimate goal of these strategies is to enable people to withstand volatility over the long term.

Ethereum options are concentrated in options expiring on July 31, 2020, and Dec. 25, 2020. The most concentrated options have individual strike prices of $200, $220, $240, and $280.

Source: Skew

Fund flows have been steadily shifting toward calls and away from puts, as evidenced by a declining put/call ratio since late June. This suggests that options traders see a greater chance of an upside than a downside.

Source: Skew

At this point, predicting which direction ETH will move is a futile exercise. However, with implied volatility at record lows, bullish volatility is becoming the consensus.

As Ethereum options data shows that more money has flowed into put options than calls, there is still room to take advantage of low volatility.

55% of funds are flowing into sell options | Source: Skew

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