Author: Griffin Ardern, Head of Options Desk Research Department, BloFin; Yilan
Preface
On May 23, 2024, the U.S. House of Representatives passed the 21st Century Financial Innovation and Technology Act (FIT 21) by 279 votes to 136. The legislation, driven primarily by House Republicans, will establish a system to regulate the U.S. crypto market, set consumer protection measures, and designate the Commodity Futures Trading Commission (CFTC) as the primary regulator of digital assets and the regulator of non-securities spot markets. House Democrats performed strongly. The passage of this crypto market structure bill marks the industrys most significant legislative achievement in Congress.
After the House of Representatives votes, the bill will move on to the Senate, where it will ultimately become law through presidential action.
This bill is particularly important for non-Bitcoin cryptocurrencies that are affected by the uncertain regulatory environment. It is expected to reduce the legal uncertainty and regulatory risks currently faced by many cryptocurrencies. Whether this eye-catching bill will eventually become law and whether the ETH ETF can be approved as soon as possible are also important determinants of whether the alt season can start. This article studies and summarizes the market sentiment and direction given by ETH in the derivatives market from the perspective of CME position data, option market term structure, and important MM hedging points.
The main points
From the perspective of CME’s holdings, compared with the growth of CME’s holdings before the approval of BTC ETF, it nearly doubled from 71,600 in October 2023 to a high of 138,200 after approval (January 12, 2024). Subsequently, BTC’s favorable conditions were realized, and a 20-day adjustment was carried out, with a profit of 13,000 BTC to a holding of 125,200. After February 4, another major rise began, and on March 22, it reached the current high point of CME’s holdings, 176,100.
· CMEs holdings increased from 225,900 on May 20 to 312,100 on May 23. The significant increase in holdings occurred in a short period of time, which also shows that institutions were not active in betting on ETH ETFs before, and there were no large number of long positions betting in advance. Currently, ETH CMEs holdings are still on an upward trend.
ETH has selling pressure from option market makers around $4,000, and a large amount of end-of-day option hedging buying pressure around $3,750 has been touched. The main hedging support has now moved down to around $3,500. From a hedging perspective, ETHs volatility range is around $3,500-4,000, but if more external demand or supply emerges, it will break through this hedging range.
The term structure of the options market and the ETH/BTC forward rate still indicate that BTC is more bullish at longer maturities.
Data source: Coinglass
From the perspective of the options market, first of all, in terms of term structure, BTC shows an overall upward structure, and the implied volatility increases with the increase of expiration time, which means that the market expects that the long-term volatility will increase. On the contrary, ETH has high expectations for recent market volatility, and IV gradually declines in the long term. This means that BTC is still the target of long-term trading in the market, but the recent volatility performance of ETH is exciting.
Data source: Signalplus
From the data of various periods of option gamma level, there is at least 5,000 ETH of hedging selling pressure around 4,000, and a large amount of hedging buying pressure of end-of-day options around 3,750 USD has been touched. At present, the main hedging support has moved down to around 3,500. Therefore, from the perspective of hedging, the fluctuation range of ETH exists around 3,500-4,000, but if there is more external demand or supply, it will break through this hedging range.
2024.5.23 1:00 EST
2024.5.23 14:00 EST
Gamma is a measure of the rate of change of Delta (the sensitivity of the option price to changes in the underlying asset price).
For the seller, as the price of the underlying asset rises, the Delta of the sold call option will become closer to -1 (e.g. if the Delta is -0.3 at the beginning, it may become -0.6). A negative Gamma means that as the price of the underlying asset rises, the rate of change of Delta will slow down. This increases the risk for the seller because they need to buy more hedges in rising market conditions.
However, when the overall market is in a net buying position, that is, there are more positions with positive gamma, hedging is mainly based on selling high and buying low, that is, there is a greater demand for selling spot ETH at the 4000 position for hedging.
