Volatility Review December 2024
Despite the largest single-day expiration events on Dec 27, 2024, the volatility of BTC, ETH and SOL spot prices has been decreasing, rather than spiking, defying expectations of a volatile event driven by a delta-hedging unwind. In our December review, we cover why this was the case, highlighting that only $65.53M of the $350M BTC options expired in-the-money (ITM), including calls with strikes far above the spot price and puts below it.
Reflections From Year-End Expirations; Will $100K Hold This Time?
Key Insights
- Despite the largest single-day expiration events on Dec 27, 2024, the volatility of BTC, ETH and SOL spot prices has been decreasing, rather than spiking, defying expectations of a volatile event driven by a delta-hedging unwind.
- Given that only $65.53M of the $350M BTC options expired in-the-money (ITM), including calls with strikes far above the spot price and puts below it. The small volume of ITM options and their delta profiles likely limited the potential for significant hedging-driven market impact.
- BTC, ETH and SOL term structures steepened post-expiration, with longer-dated implied olatility trading at a premium. Short-term spikes in implied volatility occurred during rallies above $100K, but were less pronounced in early 2025.
- The most recent return to BTC prices above $100K hasn’t yet seen a reinversion of BTC’s term structure, but shorter-tenor volatility smiles have once again exhibited a bullish call-skew.
The Source of December’s Volatility
As with dated futures markets, open interest in crypto options markets is heavily concentrated at quarterly expirations, not least because these contracts are introduced the largest amount of time before their expiration date, and so accumulate a larger level of liquidity earlier. This effect is compounded for year-end expirations, which have historically tended to accumulate the largest concentration of options positions in crypto.
December’s end-of-year expiration date of Dec 27, 2024 saw one of the largest single-day expiration events in crypto derivatives history, as more than $435M in options contracts expired across the BTC, ETH and SOL markets.
In traditional finance (as in equities options markets, for example), such expiration events are closely watched as possible drivers of volatility. Market makers and other sophisticated trading outfits are generally assumed to be the sellers of the majority of options positions. Furthermore, much of expiring options open interest is assumed to have its delta hedged with offsetting positions in the underlying spot market. The expiration of options open interest means that those positions no longer need to be hedged and the offsetting spot positions are closed, potentially resulting in a volatile spot move.
However, December’s expiration event did not spark a significant increase in volatility whatsoever, despite expectations to the contrary from many observers. In fact, the realized volatility of each of BTC’s, ETH’s and SOL’s spot prices fell from its mid-December high — as did volatility expectations across the options market of each token in the aftermath of the event.
As the chart above shows, the price swings close to the Dec 27, 2024 expiration date were far less extreme than the pullback from BTC’s all-time high on Dec 18, 2024. In fact, as we will explore in more detail later, that retracement event marked one of the most volatile periods since the U.S. elections on Nov 5, 2024.
December’s End-of-Year Expiration Non-Event
So why did December’s expiration not live up to its billing? A closer look at the BTC options that were expiring at the end of the year, by far the largest market of the three, reveals why the anticipated volatility didn’t materialize:
While many positions expired in-the-money, resulting in a payout to the holders of the options, the majority of the significant end-of-year open interest expired worthless and out-of-the-money: calls with strikes below the settlement spot price at expiration of $94,984.01; and puts with strikes above it. If we instead plot only these options, we see that the open interest expiring in the money — at just $65.53M — is far smaller than the headline figure of around $350M for BTC’s contracts.
A large proportion of the ITM open interest was call options at strikes of $70K, $75K, $80K, $85K and $90K, which combined resulted in a total payout of $3.96M to their holders. Much of this open interest was placed (as we might expect) long before BTC’s spot price crossed above these strike levels. In fact, most of the call options that expired at a profit to their holders at the end of 2024 were placed between September and October, with the largest strike, $90K, exploding in activity before the election date of Nov 5, 2024, and again just after, as BTC’s spot price hurtled above that same strike level. See the chart below, which highlights these call options alongside BTC’s spot price:
The puts that expired ITM, however, were clustered around strikes between $95K–$105K, with $28.5M of open interest at strikes between these two levels. As the chart below shows, much of these positions were taken out after spot levels had passed the strike, evidencing a significant level of protective put buying as a hedge against a retrace in spot — that was ultimately delivered before the expiration date.
Of the open interest that expired OTM, a significant portion was in calls at strikes far above the eventual settlement spot price of $94.98K, with more than $80M expiring at strikes at $20K intervals between $100K and $200K. Much of this open interest was placed during spurts higher in spot price: during the initial post-election rally; the recovery rally after bouncing from $100K in late November; and on the march to BTC’s current all-time high in mid-December. Notably, just under $20M of the outstanding open interest was closed ahead of expiration, largely at the $110K strike.
Despite the lofty ambitions and heady price targets for 2024 expressed by buyers of calls, the majority of December-dated options contracts expired OTM. As a result, the delta on those open contracts trended down toward zero long before expiration. Those contracts with delta profiles at expiration made up a far smaller percentage of the total open interest. Therefore, we believe that, even if a significant proportion of either side of the open interest was traded by sophisticated outfits, who are likely to hedge their delta profiles dynamically, there was ultimately not enough delta hedged to cause a significant increase in volatility at the moment of expiration.
However, the relatively smaller size of the crypto options market (compared to spot and perpetual markets) suggests that it would generally be unlikely for hedging flows alone to significantly impact volatility levels, even if much of this open interest expired ITM. Until the hedging activity of options positions makes up a significant proportion of spot and perpetual swap volumes, we wouldn’t expect as large of an impact of expiration events on volatility.
The Growing Volatility Premium
Earlier, we showed that December’s pullback from all-time high spot prices in BTC marked one of the most volatile periods since the U.S. elections; that much is confirmed by the realized volatility (of each) of BTC, ETH and SOL throughout December, which spiked strongly during the move. This was particularly true for ETH and SOL, whose realized volatility spiked above 90% and 110% respectively.
However, the period immediately following this event saw each of these cryptocurrencies end the month by trading with a realized volatility level that was at the bottom of its post-election range. This corresponded with a move sideways in spot prices, without a decisive direction, until the turn of the new year. Meanwhile, implied volatility levels (especially for BTC and ETH) traded sideways throughout much of late December.
SOL’s volatility levels are conspicuous in the chart above, spiking more strongly in response to the sell-off and dropping far faster during the expiration event and in the weeks since. This can be explained by the sharper spike and deeper drop in realized volatility (tracked in its direction by the implied volatility).
However, despite falling slightly on the lack of any volatile end-of-year spot moves, the forward-looking volatility expectations at the beginning of 2025 remain much higher than recently delivered levels for all liquid options markets (see charts, below, which show that BTC’s implied volatility is trading almost 10 points above BTC’s recently realized levels, and ETH’s even higher above ETH’s realized volatility).
As a result, the premium of implied volatility above the level of volatility that spot has most recently traded with is at its highest since before the election — when markets were pricing in a significant event risk on the horizon.
Now, though, with the spread between the two widening again, there is no clear event catalyzing the growing (relative) demand for shorter-tenor volatility exposure. However, in contrast to the growing levels of implied volatility into the election event, this time it is a stable implied volatility level and a strong decline in realized volatility that are widening the spread — indicating that traders have been unwilling to give up convexity exposure over the potentially quieter winter break in case of a surprise swing in spot.
Another Run to $100K — But Are Options Markets Supporting It?
The term structure of an asset’s at-the-money implied volatility is incredibly important for traders looking to judge where to express the views they have on the underlying asset. We’re used to seeing a “steep” term structure, in which longer-dated tenors trade with a higher level of implied volatility as they price in a “volatility premium.” Options are sold at a higher price to account for the uncertainty in the level of volatility that will be delivered over the tenor of the option. When the market becomes dislocated, and traders express an outside demand for short-term exposure to spot moves via options, we see an “inversion” of the term structure, as shorter-tenor implied volatility rallies above levels at longer tenors.
The steepening of ETH’s and SOL’s term structures has brought them in line with BTC’s term structure, which has traded with a steeper shape since mid-November. For much of the last month, despite remaining levels of bullishness ahead of president-elect Trump’s inauguration on Jan 20, 2025, longer-dated implied volatility has traded at a premium compared to that at shorter-tenor options.
However, the first successful crossing above the $100K barrier in early December 2024 was a striking exception to that trend, as short-term volatility once again indicated a strong demand for exposure to the movement higher (which, from the open interest analysis in the first section of this report, we saw was expressed in both put and call options). The event was repeated when, having temporarily dipped back below the key psychological barrier, BTC marched to an all-time high of $108.2K on Dec 17, 2024 — and the 7-day tenor implied volatility spiked back above the level of the 90-day tenor implied volatility.
The beginning of 2025 has brought with it another visit above $100K, but without the strong level of inversion in the term structure of at-the-money implied volatility. This indicates that the move higher isn’t being driven by a large amount of overzealous leveraged positions — which aligns with the more reasonable levels of funding rates paid by long positions of perpetual swap contracts, as well as the relatively lower premium of BTC’s futures prices above spot. This difference is clear in the chart below, which shows the level of inversion of the term structure (particularly strong ahead of the election on Nov 5, 2024) has been trending downward, and hasn’t yet reacted as strongly to the most recent rally.
What the rerun back above $100K has resulted in, however, is a return to the strongly bullish call-skew at BTC’s shorter-tenor volatility smiles. Once again, though, we notice a difference between this move above $100K and the first two — shorter-tenor skews aren’t more strongly skewed toward calls than longer tenors (as was the case in early and mid-December).