Volatility Review November 2024

November Option Volatility Report: Volatility on the Road to $100K

Key Insights

• An initial post-election rally saw a release of the positioning that had been taken up in options expiring immediately after the election, before the rally continued and implied volatility at short-dated tenors moved in lockstep with spot prices.
• Following the first attempt by BTC markets to breach the key psychological $100K barrier faltered on Nov 22, 2024, volatility markets switched focus to ETH following a period of outperformance in spot price that has seen bullish sentiment in derivatives markets exceed that of BTC for the past month.
• Repeated visits of BTC to the lower end of its $95K–$100K range saw an increase in short-dated protective put buying, but no significant unwind of upside positions in calls that were ultimately validated by early December’s rally above $100K.
• ETH markets regained the implied volatility premium above BTC that we had come to expect as a result of its higher level of realized volatility. At the beginning of December, both ETH and BTC’s term structures are inverted as spot  is on the move once more.
• BTC's breakthrough past $100K occurred against a relatively flat-to-steep implied volatility term structure. The move was highly anticipated throughout November, and the rally caused yet another inversion in the term structure of the kind that we had seen several times since the election.

The U.S. Election Dominated Positioning

November’s wild spot action reverberated across derivatives markets as crypto volatility exhibited some interesting trends. The inversion of the term structure of at-the-money implied volatility took center stage in the weeks leading up to the election on Nov 5, 2024, as short-term implied volatility surged around 25 percentage points above post-election expirations. Along with the activity in perpetual swaps and futures markets that indicated bullish positioning ahead of the event, the strong relative demand for optionality at expirations close to the election date indicated that traders were focused solely on the outcome.

However, the immediate aftermath of the election saw a sharp drop in volatility at short-tenors down to post-election expiration levels. While the spot price rallied higher — resulting in higher levels of realized volatility — implied volatility dropped as the uncertainty of the election result dissipated. We did not see a drop in expectations of volatility over a longer horizon, though. While the front-end of the term structure leaked downward (as shown by the 7-day tenor implied volatility in the chart above from Nov 5–10, 2024), the 90-day and 180-day constant tenors remained stable at above 50%.

This period of a steepening term structure was not to last, as BTC’s spot price accelerated to hurtle through $80K and above. In tandem, short-term implied volatility levels shot back higher than longer tenors — not as a result of heightened anticipation around an upcoming event, but because traders were looking for upside exposure via both ATM and OTM call options.

The following two-week post-election period was marked by a repetition of this behavior, as the term structure oscillated between periods of inversion and steepness, suggesting a highly reactive market that was adjusting to shifting sentiment swiftly. In fact, the nearly two-week stretch was one of the longest periods of inversion that we’ve observed in BTC options markets.

This highlights a key point that any trader must be aware of when trading options: the value of an option (and therefore an options traders portfolio) is dependent on volatility expectations until expiry. Therefore even when using options to take a directional view on spot price, options traders must also take a view on the level of volatility they expect relative to the level implied by the market price of the option. In the post-election case described above, many option traders who had taken exposure at longer dated expirations may have called the spot rally correctly, but seen their gains capped by a corresponding drop in implied volatility.

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Longer-Tenor Volatility Steepens, Before Inverting Again Following $100K

After the election, BTC’s options markets saw a pronounced inversion in the term structure whenever spot prices rallied across both BTC and ETH markets. Each new breakthrough to novel price levels saw traders rush to increase their exposure, and each period of subdued spot activity saw the term structure consistently return to a flatter shape.

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This recent pattern underscores the close relationship between short-term spot price moves and short-tenor volatility levels. Throughout the post-election rally, traders were largely reactive to spot, rather than positioning for long-term views. This is clear in the chart below, which shows that the level of inversion of the term structure (measured by the spread between the 7-day constant tenor implied volatility level and that of the 270-day tenor) moved in lockstep with spot on the way up.

However, between Nov 17, 2024,  and Dec 1, 2024, the strength of the relationship fell — at least for BTC’s markets. The term structure began to steepen despite BTC charging toward the key $100K figure because longer-dated options finally began to move higher on the back of a sustained increase in volatility across the rest of the term structure. It wasn’t until Nov 19, 2024, a full two weeks after the election, that traders began to price in the view that — just maybe — the volatility the market was experiencing in the short term was here to stay.

At the start of December, the implied volatility term structure transitioned from its previously steeper shape to a slightly flatter profile, driven by a rise in short-dated implied volatility towards the newly elevated levels of longer-dated tenors. Although this was not a full inversion like the extreme shifts observed in November, it signaled that the options market remained highly attuned to expectations of further spot price movements. Positioning was heavily concentrated on BTC’s potential to break out of its current range to the upside, while the exact timing of the breakout remained uncertain.

BTC’s recent surge past the $100K mark validated this anticipation and triggered a swift market repositioning. Short-tenor implied volatility has skyrocketed above longer dated levels once more, catching many off guard during what had been a period of relatively tempered expectations for immediate volatility. Now, options markets appear to be back in rally mode.

ETH in Focus - ETH Volatility Bottoms Out

Since Nov 17, 2024, and during BTC's temporary inability to breach the anticipated $100K milestone, ETH briefly emerged as more consistently bullish in derivatives markets. While both currencies exhibited similar volatility patterns in the immediate post-election period, ETH gained additional momentum and attention following the resignation of SEC Chair Gary Gensler that coincided with BTC’s sideways movement.  

This trend is evidenced in increased short-dated options positioning, resulting in the same kind of term structure inversion that we observed with BTC earlier in the post-election aftermath.

ETH's narrative dominance over BTC from Nov 19, 2024 onward is clearest in spot markets. Note that ETH initially outperformed BTC on election night, as it has in almost every major volatility catalyst in 2024 (including both ETF announcements), before giving up all of those gains just as quickly. After Gary Gensler’s resignation, ETH gained significant traction against BTC, as reflected by the sharp drops in the BTC/ETH spot price ratio from Nov 5 – Nov 21, 2024. This most recent move was sustained, and has not been fully reversed by the early December breakout.

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The shift in focus from BTC to ETH on Nov 19, 2024 was reflected in options markets, too. As visible in the chart below, the level of volatility implied by BTC options expressed as a multiple of same-tenor ETH implied volatility diverged notably both post-election and after Gary Gensler’s resignation. ETH’s options volatility surpassed BTC’s on both occasions.

This surge in ETH volatility pointed to a stronger demand for ETH optionality than for BTC following the news, but we must highlight that this is a return to usual programming for the pair, rather than an unusual dislocation. ETH has, throughout almost its entire history, moved with a high correlation to (but much larger volatility than) BTC.

Therefore, ETH options markets have consistently priced in a premium to its volatility over BTC, and the ratio between their levels has touched parity on only a few occasions. Recent events, however, have thus reestablished the typical pattern, pushing the ratio lower and reinforcing ETH's position as the more volatile asset.

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BTC Call-Put Skew Remains Strongly Positive

The call/put skew measures the relative demand for calls (bullish upside exposure) by comparing their implied volatility level to that of puts (bearish downside protection). Since the U.S. elections on Nov 5, 2024, the skew of BTC’s and ETH’s volatility smiles has been strongly toward calls, indicating a strong relative demand for upside exposure throughout the rally. That demand for participation in the rally has only strengthened with spot moves, as each leg higher has seen a stronger skew toward calls.

However, when BTC’s spot price retraced as low as $91.3K after failing to break through the key psychological $100K barrier throughout November, Bitcoin short-dated expirations skewed as much as 6% in favor of puts. This meant that the implied volatility of 25-delta put options was trading six points above that of 25-delta calls — usually a clear sign of bearish sentiment.

This was at odds with the sentiment expressed by futures and perpetual swaps markets. Bitcoin futures prices continued to trade significantly above spot prices throughout the sell-off, and the funding rates of BTC perpetual swaps reflected a persistent willingness of long positions to pay the funding rate for the pleasure of their leveraged long positions — a sign that traders expected further bullish price action that was ultimately validated when BTC broke the $100K barrier in early December.

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Protective Puts Over Closing of Calls

The dislocation was not as it seemed, though. Short-tenor volatility smiles skewed toward OTM puts because of a demand for BTC puts, not because of a supply of OTM calls. That can be seen in the chart below, which compares the 1-week constant tenor volatility smile on Nov 25, 2024, when the spot price traded above $98K, and Nov 26, 2024, having fallen below $91K. The implied volatility of OTM calls is largely the same, if a little bit lower, suggesting that the market was assigning largely the same value to bullish OTM call options despite the dip.

Instead, it was a 10+ point rise in the implied volatility of puts that ultimately caused the volatility smile to skew to dip so strongly bearish during the sell-off.

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This indicates that, far from giving up hopes of BTC’s spot price rallying higher, this move was likely a rush to hedge long positions (in either options or in linear products). Trader’s believed that any sell-off would only be temporary, and positioned themselves accordingly.

Reaching a key price level such as $100K should have been expected to bring with it a potential for increased market volatility. The sentiment that this was a short-term blip on the road higher was echoed by the fact that volatility smiles for longer-dated expirations (all those with a tenor longer than 1 month) did not see the same demand for protective puts. Instead, they retained their bullish skew throughout the move lower, a view that was eventually vindicated as Bitcoin’s spot price rallied above $100K.

Throughout much of 2024, BTC options markets reflected a more bullish skew than for ETH, with only a notable period of heightened bullishness for ETH between June and July 2024 during anticipation of its ETF launches. But as BTC’s skew levels dropped more sharply, ETH skew remained more resilient, aligning closely with the trend seen in the implied volatility ratio. However, while ETH’s skew opened up a wider spread above BTC’s at matching tenors after the election and Gary Gensler’s resignation, as traders positioned more aggressively for ETH outperformance, BTC’s triumphant claim of the key $100K level has seen that reversed.

The current period reflects a return to the norm for 2024, meaning that ETH volatility is priced higher when compared to BTC, and skews indicate this has taken place alongside slightly higher bullishness for BTC at short tenors, despite traders in both markets positioning for further moves higher on the back of BTC’s latest milestone.

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