Ethereum ETF approved, what can the derivatives market expect?

Author: Griffin Ardern, Head of BloFin Options Desk & Research Department; Yilan, Cycle Capital

Foreword

On May 23, 2024, the U.S. House of Representatives passed the 21st Century Financial Innovation and Technology Act (FIT21) by 279 votes to 136. The legislation, mainly promoted 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 most important legislative achievement of the industry in Congress.

After the House of Representatives votes, the bill will continue to the Senate, and finally through presidential action to decide whether it can become law.

This bill is particularly important for non-Bitcoin cryptocurrencies that have been 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 can eventually become law and whether the ETH ETF can be approved as soon as possible are also important determinants of whether the cottage season can start. This article studies and summarizes the market sentiment and direction of ETH in the derivatives market from the perspective of CME position data, option market term structure, and important MM hedging points.

Main Points

• From the perspective of CME's position, compared with the growth of CME's position before the approval of BTC ETF, it increased from 71,600 in October 2023 to a high of 138,200 after approval (January 12, 2024), nearly doubling. Subsequently, BTC's favorable conditions were implemented, and a 20-day adjustment was carried out, with a profit of 13,000 BTC to 125,200 BTC positions; after February 4, another major rise began, and on March 22, the CME position reached its current high of 176,100.

• From the perspective of CME's open interest, it increased from 225,900 on May 20 to 312,100 on May 23. The significant increase in positions occurred in a short time span, which also shows that institutions were not active in betting on ETH ETFs before, and there were no large-scale long bets in advance. Currently, ETH CME's open interest is still on an upward trend.

• ETH has selling pressure caused by hedging by 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, ETH's volatility range exists around 3,500-4,000, but if there is more external demand or supply, it will break through this hedging range.

• The term structure of the options market and the forward exchange rate of ETH/BTC still indicate that BTC is more bullish in the longer term.

From the perspective of the options market, first of all, in terms of term structure, BTC presents 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.

From the data of various maturities of option gamma level, there is at least 5,000 ETH of hedging selling pressure near 4,000 ETH, and a large amount of hedging buying pressure of end-of-day options near US$3,750 has been touched. The main hedging support has moved down to around 3,500. Therefore, from a hedging perspective, ETH's volatility range exists around 3500-4000, but if there is more external demand or supply, it will break through this hedging range.

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 (for example, 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 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, when 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 4000 for hedging.