Notes on the Options Market in BTC, December 2019
Takeaway — BTC options markets appeared to stumble going into year-end as volumes and prices fell below their autumn 2019 averages, while the high-profile launch of ICE’s options exchange ended up as so much hot air. A vitiating explanation for this decline could lay in both often-observed holiday mechanics as well as the coincidence of quarterly and monthly expiries on Dec 30.
A December lull crept into the BTC markets as evidenced by the lack of major moves in the spot price. Daily returns for the month exceeded +/- 3% only four times (over the past year, you expect more than seven in a month), realizing a trailing 30day annual volatility of 49%. The biggest move came on Dec 18, as BTC rallied +10% to recover from a brief break below $7000.
Implied volatility fell in concert, spending all of December at or below the November lows, with a pronounced drop after a slight rally in the +10% move.
Here it becomes useful to note the divergence of 1 month volatility from the longer dated options. This is in line with what can be seen today as a rather steep term structure, particularly in the 2mo-3mo curve.
Note another divergence in the skew values, with 1mo skew tracing higher against stationary 3mo and 6mo skews.
Amidst this price action and forgetting the +10% day, volumes tapered into year end.
This is in fact despite the coming online of Bakkt’s (a subsidiary of ICE) options exchange. As of pixel time, I can find one example of reporting on the Bakkt platform’s volumes so far, when on Dec 13 XBTO and Galaxy printed the exchange’s first block trade for $2mm (h/t AMBCrypto’s Biraajmaan Tamuly). Today, Skew marks Bakkt’s recent daily volumes at $30k traded — by dint of options contracts being worth discrete amounts of BTC (you can’t buy or sell fractional options), this dollar value represents something like 4 or 5 contracts going through each day.
It is to the options ecosystem’s detriment that this is the result of so much saber rattling between the institutional exchanges. The finer slicing of risks and exposures that the presence of a healthy options market provides for ought to inspire new money to come in from the sidelines. What’s more, the infrastructure that ICE and, soon following, the CME provide should allow that new money to come in larger buckets. A start like this is far from auspicious, and one might wonder whether the CME’s commitment to launch their own options exchange in the coming weeks hasn’t been tested by the uninspired response to Bakkt’s flows.
I write this in dire risk of being found a nincompoop, as many other commentators were in the weeks following Bakkt’s futures launch in September of last year. Despite a start so slow that it was blamed for a major coincident drop in BTC spot, that business has found its adoptive footing and now trades tens of millions USD daily. Here, however, the feeling of a misstep having been committed is harder to shake, if only because there has been so little said about it at all.
To conclude the presentation of data, notice the pattern of open interest in BTC options.
While the persistent sawtooth pattern is unmistakable, there’s a sharp amplification between the Dec 30 drop and the prior Nov 29 datapoint. Akash Girimath, writing for AMBCrypto, commented similarly. This seems entirely explained by several expiries happening on the same date, as we see an equally dramatic drop around the end of September, implying that the simultaneous closing of sub-monthly, monthly, and quarterly (perhaps even yearly) options is to blame.
A start like this is far from auspicious, and one might wonder whether the CME’s commitment to launch their own options exchange in the coming weeks hasn’t been tested by the uninspired response to Bakkt’s flows.
Excepting the changes in open interest, it seems the options market underwent atypical price and volume action in December, anomalies which grew into the close of the year. What could motivate these year-end moves?
To start, the holiday period has been long-known to be statistically different from a performance perspective (and thus, integrating, a price perspective). No less than Frank Fabozzi found in 1994 that there were “significantly higher preholiday returns in futures contracts compared to nonholiday returns…consistent with positive holiday sentiments. The holiday effect is uniquely independent: The magnitude of excess holiday returns is the largest among all seasonal variations.”
Monotonically higher returns are not the only manifestation we observe in markets around the holidays. You might recall what happened at year-end 2018 in the equities markets — Fred Imbert, writing for CNBC, explained:
…on Christmas Eve, the S&P 500 was down more than 20 percent from its record high on an intraday basis…[stocks] would come soaring back in the next session, with the Dow jumping more than 1,000 points on Dec. 26, its biggest ever point gain. Traders had trouble pinpointing the cause of the extreme volatility, with some chalking it up to computer-driven trading.
It may then be the case that what would probably be best described as a quiet December for BTC was merely the outcome of a holiday phenomenon we see in other financial markets. If this effect is so important as to depress volatility to sub-50% annualized levels, we might be smart to look for it occurring again in a few weeks, at the start of the Chinese New Year celebrations.
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