BTC and S&P 500 options diverge, suggesting major market volatility

Author: Omkar Godbole, CoinDesk; Compiler: Wuzhu, Golden Finance

Summary

• Short-term BTC options show a preference for call options, indicating optimism about the US election on November 4.

• According to data tracked by Block Scholes, S&P 500 options suggest otherwise, and some crypto traders have been “selling volatility.”

The view that Bitcoin (BTC) typically moves in sync with the S&P 500 is now generally accepted. However, this positive correlation may be tested in the run-up to the US election as options market pricing points to different trends.

Bitcoin options listed on major cryptocurrency exchange Deribit on Monday showed a clear bias toward short-term calls over puts, capturing the U.S. election and its results announced on November 8, according to data tracked by analytics platform Block Scholes.

Meanwhile, short-term options tied to Wall Street's benchmark stock index S&P 500 showed a bias toward puts.

The relatively strong demand for Bitcoin call options suggests that traders expect upward volatility or price increases during the election. Call options offer buyers asymmetric upside, allowing entities to hedge or profit from price increases.

The bias toward S&P 500 put options indicates concerns about downside volatility, as put options protect against price declines. Note that index options bias typically shows a bias toward put options for a variety of reasons, including portfolio managers hedging against tail risk.

However, Block Scholes CEO and founder Eamonn Gashier said the divergence between Bitcoin and S&P 500 options is “poised for big things.” “Either the strong positive correlation between bitcoin and the S&P 500 is about to break down and turn negative, or one of the markets is mispriced. What’s exciting is the uncertainty — are we about to see bitcoin decouple from equities, or are traders in one market about to be caught off guard?” Gashier told CoinDesk. Some crypto traders ‘sell volatility’ Betting on flat price action or falling volatility ahead of binary events like the U.S. election may seem counterintuitive, but some traders are doing just that. Implied volatility (IV) for election expiration options trading on Deribit has fallen from 62% annualized to 55% on Nov. 8, according to data tracked by crypto liquidity provider Wintermute. It’s a sign that traders are developing volatility-bearing strategies. IV is affected by demand for options.

“Traders are selling volatility through strangles, straddles and volatility spreads. Most of the positions are around $65,000,” Jake Ostrovskis, an over-the-counter trader at Wintermute, told CoinDesk.

“All of these trades benefit from lower volatility — so bets on realized implied volatility, as these events have done in recent history,” Ostrovskis added.

Selling straddles and strangles means selling calls and puts, betting that the price of the underlying asset will remain largely range-bound. The seller collects a premium, which is retained if the price remains in a narrow range until expiration. However, it is a risky strategy better suited for savvy traders with a good supply of capital, as losses could quickly mount and far outweigh the premium received if volatility spikes.

According to the Financial Times, The intense presidential campaign has traders of the S&P 500 and CBOE Volatility Index (VIX) betting on a surge in volatility through VIX call options.