Event-driven price volatility

Crypto asset spot prices, particularly those of majors BTC and ETH, have recently been driven by event risks. We saw that most recently in the ETF narrative, which dominated the news cycle from early October.

The impact that the ETF deadline had on volatility markets was quite clear – the date of the known event risk travelled along the term structure of at-the-money implied volatility as the event drew closer, marked by a significant upward kink in volatility pricing (shown in the chart below normalised by the level of realised volatility over the last 30-days).

In early December, clarity around the final deadline for a response from the SEC on the outstanding ETF applications came into focus. We saw implied volatility at tenors later than the 12th Jan rise significantly above both the level of recently delivered volatility and the levels implied by options at shorter tenors.

As the deadline passed the 30-day mark, we saw the volatility implied by options near to a 30-day tenor rise. Vols departed the level of shorter tenor options (which remained well anchored to the level of volatility recently delivered) and moved higher to match the increased volatility expected after the deadline date.

The collapse in volatility in the days after the announcement was dramatic. Spot prices failed to deliver either the sustained rally or sharp selloff for which long-volatility traders had been bracing, but realised volatility (the denominator in each of the series plotted in the figure above) actually rose into the ETF event. This was likely due to the bundled announcement by the SEC. Forward-looking volatility expectations (which had risen high above realised in the days before) corrected strongly back below.