Ether‘s options market is witnessing an explosive growth as the second-biggest cryptocurrency rallies to fresh all-time highs above $2,400.
Open interest, or the total number of open long and short positions in call and put options, rose to a record $3.3 billion Wednesday, topping the previous peak of nearly $3 billion observed on March 13, according to data provider Skew.
The value of open positions has gone up by roughly $1 billion since March 26, and ether’s price has appreciated by over 50% over that period. Ether (ETH), the native cryptocurrency of the Ethereum blockchain, jumped early Thursday to a new all-time high of $2,487.
Options trading volume has increased rapidly to $425 million, from $183 million as recently as late March. Open interest in the ether futures market has also jumped to new record highs above $8 billion.
Options are derivative contracts that give the purchaser the right but not the obligation to sell the underlying asset at a predetermined price on or before a specific date. A call option represents the right to buy, and the put option gives the right to sell.
While open interest has surged with the cryptocurrency’s price, ether’s one-month implied volatility (IV), or investors’ expectation for price turbulence, remains low.
Volatility peaked above 190% (annualized) in January and fell to a four-month low of 73% on March 28. Since then, it is hovering in a narrow range below its lifetime average of 88%, confounding observers.
As noted by dominant exchange Deribit, expectations for price turbulence in crypto markets rise during both bull and bear runs. That’s contrary to traditional markets, where implied volatility usually picks up during bear markets and subsides during bull runs.
According to Greg Magadini, CEO and co-founder of Genesis Volatility, ether’s implied volatility is being dragged lower by bitcoin (BTC).
“Although ETH holds an IV premium over BTC, I believe bitcoin options lead the crypto options market, and IV fatigue in BTC is possibly bleeding into ETH,” Magadini told CoinDesk.
Bitcoin’s one-month implied volatility is also hovering below its lifetime average of 74.7% at press time. However, ether’s implied volatility will likely decouple from bitcoin’s once institutional money flows into Ethereum’s native cryptocurrency.
“Bitcoin’s market has gotten used to institutional inflows. However, ether has not had huge corporate buyers, and any news of that would be a “surprise” to the market,” Magadini said. “That makes ETH options interesting here.”
Traders usually buy options when the market is seeing below-average implied volatility and sell options when the IV is too high. Implied volatility has a positive impact on option prices and is mean reverting.
Ether is currently trading near $2,450, representing a 232% year-to-date gain, according to CoinDesk 20 data.