In a market characterized by volatile price action and uncertainty, major traders of major cryptocurrencies are quietly taking divergent paths.
While Bitcoin investors prepare for volatility with non-directional options plays, some traders are betting on the opposite, as recent block trades on crypto options exchange Deribit show.
Over the past week, strangles accounted for 16.9% of Bitcoin options blocks traded on the platform, while straddles accounted for 5%. Both are non-directional volatility strategies, betting on large price movements, both up and down. In contrast, XRP traders sold strangles, in effect betting against increased volatility.
A strangle involves purchasing out-of-the-money (OTM) call and put options with the same expiry but different strike prices, equidistant from the spot price, providing a profitable way to profit from large swings. For example, if the spot price is $104,700, then purchasing the $105,000 call and the $104,400 put simultaneously constitutes a long strangle.
A straddle involves purchasing at-the-money call and put options at the same strike price, resulting in a higher initial cost but greater sensitivity to volatility.
Both strategies can lose premiums paid if the anticipated volatility does not materialize. Note that the bet here is on volatility and does not necessarily imply a bullish or bearish price outlook.
According to Luuk Strijers, CEO of Deribit, together these non-directional BTC strategies exceed 20% of total block flows, an unusually high figure.
“This suggests a market struggling with uncertainty, in which traders anticipate large price movements but remain uncertain about the direction,” Strijers told CoinDesk.
Block options trades are large, privately negotiated transactions involving significant quantities of options contracts, typically executed outside of the open market to minimize their impact on price. They are primarily conducted by institutional investors or large traders and allow the discreet execution of large positions without triggering market volatility or prematurely revealing trading intentions.
The preference for non-directional strategies highlights why the crypto options market is thriving: it allows traders to speculate on volatility as well as price direction, facilitating more effective risk management.
Deribit’s BTC options market is worth over $44 billion in notional open interest, providing crypto traders with the most liquid way to hedge risk and speculate.
Ether the market is worth over $9 billion and has exhibited a bias towards a diagonal put spread over the past week.
Rather, it is a directional to neutral strategy that benefits from time decay (theta) while also having positive exposure to implied volatility. In other words, while it’s not just a volatility game, volatility plays a role in its profit potential.
In the case of ETH, straddles and chokes cumulatively accounted for just over 8% of the total block flow over the past week.
Bet on the XRP rangeplay
Deribit’s XRP options market remains relatively small, with notional open interest of approximately $67.6 million. Block trades are infrequent, but tend to be large enough to attract market attention when they occur.
For example, on Wednesday, a short trade on XRP was executed on Paradigm’s OTC desk and then recorded on Deribit. The transaction involved the sale of 40,000 contracts of $2.2 calls and $2.6 puts expiring on November 21, representing 80,000 XRP with an average premium of 0.0965 USDC.
A short strangle is a bet on volatility compression and the trader behind the short strangle is betting that macroeconomic nervousness is priced in, according to Lin Chen, head of Asia business development at Deribit.
“Cryptocurrency volatility remains elevated overall amid broader risk aversion driven by macroeconomic uncertainties, including U.S. government shutdown and reopening dynamics as well as expectations around a December rate cut,” Chen said in an interview. “Implied volatility in the XRP price jumped above 80%, reflecting this increased uncertainty.
“The trader is effectively betting that these macroeconomic risks are now fully priced in. Their view is that XRP will remain in a range between $2.2 and $2.6, and the return from selling the strangle looks particularly attractive,” Chen added.
Shorting a strangle can be a costly strategy if volatility increases unexpectedly, potentially leading to unlimited losses when the underlying price significantly exceeds the strike prices.
Because of this significant risk, short sales are generally considered high-risk transactions that are unsuitable for most retail investors unless they have strong risk management and a high tolerance for potential losses.
