Eth Spot ETF News Spurs Options Trading Surge: Bullish Calls Dominate at $3800, While Institutions Hold Short Positions

On May 23, Kaiko, a cryptocurrency market data analysis firm, published a report titled “Crypto Derivatives: Positioning and Outlook.” According to Kaiko’s data, the trading volume of ETH options expiring on May 31 increased from $8 billion on Monday to nearly $11 billion by Wednesday.

Bullish Sentiment Dominates Ethereum

Bullish options remain predominant, with the highest trading volumes seen at strike prices of $3600 and $3800, the latter being completely dominated by call options. This indicates that traders are optimistic about ETH, particularly in anticipation of a potential ETF approval in the United States.

However, some traders are hedging against a potential “buy the rumor, sell the fact” scenario by purchasing protective puts at strike prices around $2800 and $2600. Although these options are currently out of the money, the situation could change within the next seven days depending on the SEC’s actions.

With the SEC’s apparent reversal towards the approval of an Ethereum spot ETF, the implied volatility of ETH contracts expiring in the coming months has surged. From Monday to Wednesday, the implied volatility of contracts expiring on May 31 jumped from 60% to over 90%. In contrast, the implied volatility of BTC contracts for the same expiry date remained unchanged.

Increased implied volatility typically indicates reduced trader confidence in price direction, prompting them to pay higher premiums to protect their positions or speculate on potential price movements, whether up or down.

Institutions Hold Short Positions

While crypto platforms dominate the derivatives market for this emerging asset class, institutional exchanges are playing an increasingly significant role. The Chicago Mercantile Exchange (CME) has offered BTC futures since 2017 and ETH futures since early 2021. In October 2023, CME surpassed Binance in open interest, becoming the largest futures exchange for Bitcoin.

The Commodity Futures Trading Commission’s (CFTC) weekly Commitments of Traders (COT) report provides a breakdown of institutional trader positions. According to the May 22 report, hedge funds held net short positions in both BTC and ETH futures on CME. However, this does not necessarily reflect a bearish outlook on cryptocurrencies. It is more likely that these funds are hedging their positions.

Hedge funds often use arbitrage strategies that exploit price differences between similar assets, selling futures while holding spot BTC or ETH. This approach protects against price fluctuations and ensures a specific selling price as the underlying assets’ prices change.

Basis trading, which is most effective when prices are rising, involves futures prices being higher than spot prices. As the expiry date approaches, the prices of futures and spot assets tend to converge.

While there is no definitive data to pinpoint the exact reason for hedge funds’ net short positions, it is most likely that these sophisticated traders are heavily hedged. It is uncommon for them to sell short without some form of protection.