For the first time ever, a research report has been released that looks back at four years of crypto options markets data. Based on underlying data sourced from Deribit and then analyzed with tools from Amberdata, the report, entitled “BTC OPTIONS: Dissecting Volatility Trends,” shines fascinating new light onto the fast-emerging world of crypto options. The report offers valuable insights to traders who are looking to run successful trading strategies based on historical data.
The co-authors of the report are Amberdata’s Greg Magadini and Fabio Bassani, as well as Euan Sinclair, an options trader and author of several options books; Samneet Chepal, a crypto quant derivatives trader at LedgerPrime; and Tony Stewart, a professional derivatives trader with over 25 years of experience.
The key findings for the report include:
- Crypto options are still inefficient, and this provides opportunities for traders to outperform.
- In 2022, BTC spot and volatility relationships resembled equity index volatility, whereas in 2021 this relationship resembled scarce commodities.
- ETH options will be a major driver of volatility trading throughout 2023 and beyond. In 2022, ETH options markets overtook BTC options markets in terms of volume and open interest for the first time ever. Institutional block trading activity in ETH options increased more than 300% in 2022.
- Monthly volumes have been growing significantly for ETH while BTC hasn’t grown significantly beyond the highs seen in January 2021.
Moreover, the report leverages insights from the data analysis to find significantly profitable trading strategies – while also reducing risk. This shows that crypto options can enhance overall portfolio performance. The report assesses a variety of systematic volatility trading scenarios, such as straddles and butterflies, and provides a complete look at the nuances of risk-reversal strategies.
Greg Magadini is the Director of Derivatives at Amberdata and one of the authors of the report. In this interview he provides some wider context about the burgeoning crypto option market.
How large is the crypto derivatives market?
If I compare the crypto options market versus say the traditional finance market, let's look at SPY, which is the S&P 500 ETF. The market cap of the equity versus the notional open interest of the options on SPY is 200%. The equity market cap in crypto is 6%. So it's still very small.
How many institutions do you think are in this market?
The best proxy for institutional engagement is going to be the Paradigm crypto derivatives trading platform. And there are about 600 active accounts there, largely small hedge funds and prop shops, rather than all the big banks.
What has been the effect of 2022 on volatility? And how do you think 2023 is going to play out?
I think this was one of the most interesting findings of the report. In equity vol, things are very well defined: If the stock market crashes, volatility goes up. Commodity vol is a little bit different. When natural gas prices rise from $2 to $6, vol goes through the roof. It's an inverse profile to what you see in equities. Crypto is still figuring out its footing. 2021 was a natural gas vol profile, so to speak. 2022 was clearly an equity vol profile. And then now we've started 2023 with a bang that looks more like the natural gas profile.
Much of the market for crypto derivatives consists of professional traders, but are there other end users who also take part?
Bid.com is a perfect example of this. They have a lot of mining companies as customers. And what you can see there is that there's a lot more put open interest on Bid.com than there was on OKX or Deribit. This shows that these miners are hedging future Bitcoin mining rewards and trying to lock in a price.
What are the top three things you'd like people to know about the report?
The first one is that the volatility regimes in crypto haven't been figured out yet. Takeaway no. 2 is that there are profitable trading strategies, such as a risk reversal, that are the inverse of how you would profitably operate in equities (in crypto you buy the put and sell the call, whereas in equities you sell a put and you buy the call). That's very interesting, because it can diversify nicely in a portfolio. And then lastly, in 2022, we saw institutional adoption of ETH options, and this meant the open interest started to outpace Bitcoin.
On February 9, 2023, CoinDesk and Amberdata will be hosting a webinar where you can learn more about crypto options trading strategies. Joining Amberdata’s Greg Magadini and Fabio Bassani will be notable options heavyweights:
- Euan Sinclair, option trader and author of several options books, and
- Samneet Chepal, crypto quant derivatives Trader at LedgerPrime.
Register for the event here.
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