Bitcoin-Volatility Collapse Forces Risk-Loving Traders Elsewhere https://finance.yahoo.com/news/bitcoin-volatility-collapse-forces-risk-112008080.html (Bloomberg) -- Bitcoin, once the unruly child of finance, is showing signs of maturity as its wild swings fade, forcing speculative traders to hunt for a new playground. The world’s biggest cryptocurrency is behaving more like a blue-chip stock as Wall Street’s buy-and-hold investors plunge in. Annualized volatility has dropped to a once-unthinkable 38% from close to 200% more than a decade ago. It is now comparable to the likes of Starbucks Corp. or Goldman Sachs Group Inc., according to Bytetree Asset Management. Investors chasing price swings are instead turning to rival Ethereum, the second-largest virtual currency. On several trading days this month, Ether exchange-traded fund volumes have matched or surpassed their Bitcoin counterparts on the heels of a corporate-buying frenzy. Both currencies rose Friday after Federal Reserve Chair Jerome Powell opened the door to an interest-rate cut in September at the central bank’s Jackson Hole Symposium. Ether jumped more than 5% to around $4,500, while Bitcoin – in keeping with its steady price moves of late — edged up less about 2% to $114,800. BlackRock’s Ether ETF launched only in April, already accounts for $5.5 billion in open options positions, roughly 40% the amount for Ether on the crypto-derivatives platform Deribit. The setup reflects a familiar rotation. Bitcoin is increasingly seen as a long-term hold. Ethereum, still earlier in its institutional uptake, has become the go-to asset for traders seeking sharper swings. “This is not an everything rally,” said Jeff Dorman, chief investment officer at digital asset manager Arca, who notes most of the trading activity of late is concentrated in Bitcoin and Ether. But the motivations differ. “For many traders, the Bitcoin trade has already played out,” said Vivek Raman, founder of research firm Etherealize. “Ethereum still feels under-owned, more volatile, and more reactive.” So far in August, investors have added $2.5 billion to Ether ETFs, compared with net outflows of $1.3 billion from Bitcoin products. Some traders are now positioning for a reversal. Arthur Azizov of B2 Ventures expects Ether to consolidate between $3,900 and $4,400, but warns that a drop to the low $3,000s is possible if leveraged bets start to unwind. “Ethereum is moving into a risk-off sentiment,” said Bradley Duke, Bitwise’s European head. “A short squeeze can’t be ruled out, but for now, many funds are preparing for a pullback.” In past cycles, rallies in Bitcoin and Ether often lifted the broader market. This time, the rest of the digital-token landscape remains comparatively quiet. For now, Bitcoin is the steady anchor while Ethereum is where the volatility lives. The tension reflects a market in transition: Bitcoin maturing into a mainstream asset with declining volatility, and Ethereum emerging as the speculative playground for traders seeking risk. Whether that divergence sparks a broader altcoin revival or leaves smaller tokens sidelined remains to be seen.
The issue of volatility dropping greatly is very relevant for those holding high-yield covered call ETFs based on Bitcoin such as YBIT, YBTC, etc. Additionally this impacts high-yield covered call ETFs effectively based on Bitcoin such as MSTY. As Bitcoin volatility drops the yield payouts on these ETFs will decrease and their market prices will drop further as NAV erosion increases. The total return will lag the market rather than leading.
The lower the volatility, the less premium will be collected on covered calls. Leading to a drop in payout amount.
Really? So you’re telling me the less chance an option has of going ITM, the less premium the writer can charge?
While volatility increases the chance of an option going in the money and being called away -- this is less meaningful for ETFs using synthetic rather than holding actual underlying equities in terms of losing upside. The pricing of options and premium the seller can get reflects the volatility (i.e. implied volatility) of the underlying product. Lower volatility leads to lower option prices. This is also coupled with the selection of how far out of the money, the purchased option is sold for in high vs. low volatility environments by these funds.
Hmmm… well, now that you mention it, when I run the PnL on an option contract through my spreadsheet — you know, the one that calculates option prices directly from raw Black–Scholes data (no API shortcuts) — and then plot it into a risk/profit chart while forecasting profits off 1SD moves at different IV%… yeah, I’m seeing that trend. I assume your sheet shows the same?
I am not trading options... so no need to run a spreadsheet to demonstrate what every CFA and business school program covering Black-Scholes and other option pricing formulas show in regards to IV and pricing.
Jeez, I wonder who warned the idiotas about the upcoming vol collapse months ago and the decimation/structural collapse of div-strategies.