Blofin Hot Pursuit: What Information Is Implied in the First Crypto Witching Day of the Bear Market?

June 24 was one of the big moments for the crypto market. On the first delivery day after the bear market began, more than 100,000 BTC options contracts and about 1.1 million ETH options contracts were delivered. At the same time, the new quarterly contracts were also generated in both futures and options markets. When the crypto market has experienced two consecutive rounds of shocks, considering the linkage between the crypto derivatives market and the spot market, the significance of this delivery can be described as "extraordinary".

Generally speaking, during the semi-annual delivery, affected by the comprehensive game between the long and short sides, the final delivery price should be near the "max pain point price". However, the continuous interest rate hikes in May and June and a series of shocks influenced the crypto market severely. In this delivery, although the short-term bearish sentiment has pulled down the max pain point to a certain extent, the actual delivery price still deviates significantly from the max pain point.

The above is due to investors' massive selling and liquidation of positions in the spot market. When investors in the spot market actively sell, the influence of the derivatives market on the spot price tends to be weakened, and the above case further reflects the crypto-asset market liquidity "limited" status quo.

From the perspective of contract open interest and delivery volume, the number of BTC options contracts delivered on Jun 24 accounted for about 31.9% of the total contract open interest, which was slightly lower than the same period last year (35.9%). Still, the total amount of contracts (88,153) was significantly higher than the previous year.

In contrast, the delivery volume of ETH options is about 28.7% of the total open interest of options contracts, which was lower than 39.2% last year. Still, the delivery scale is 1.6 times that of the previous year's.

It is worth noting that the open interest in ETH options has more than doubled compared to last year and once exceeded 3.3 million contracts. Considering the current state of low liquidity in the crypto market, changes in the ETH options market may considerably impact ETH's price.

In fact, by looking at the changes in gamma exposure, changes in the ETH options market have begun to have some implied impact on ETH prices. The surge in gamma exposure suppressed rampant selling in the spot market to a certain extent. Many call options are traded, which is one of the cases of a rapid increase in positive gamma exposure.

Before and after the crypto witching day, there were many call option buying records shown in the ETH options trading order flow, especially the block trading order flow. The purchase scale exceeded 100k contracts per day for several consecutive days, which once pushed the call/put ratio to above 0.8.

Buying a large number of call options makes market makers need to purchase spot or long futures to control risk exposure. The common long behavior from market makers and traders pushed the price of ETH to stabilize eventually.

Since the crypto market stabilized after the delivery, the market's overall sentiment has also recovered to some extent. Before delivery, the premium of BTC and ETH futures expiring in 2023q1 once fell to about 0.6%, almost the same as the spot price; after delivery, affected by the market rebound, the futures premium of BTC and ETH returned to more than 1%. However, the current premium level remains historically low compared to previous levels.

From the perspective of volatility, this delivery has not improved the medium-to-long-term risk aversion in the crypto market. After the shocks in May and June, the implied volatility surface of both BTC and ETH options showed a significant rise and inversion pattern and did not change significantly after the delivery was completed.

Usually, after a large-scale delivery, short-term volatility should be lower than long-term volatility. Still, before and after the delivery this time, the continuation of risk aversion has promoted the continuation of the volatility surface inversion pattern.

The skewness data further revealed the response of market confidence before and after delivery. Although the short-term market sentiment has recovered and is close to neutral after the delivery date, in the medium and long term, the market's stable bearish sentiment has not changed significantly, and put options still retain a significant premium over call options. The situation above suggests that bearish sentiment is likely to continue into July.

The options term structure also supports the viewpoint of risk aversion. After the delivery date, options maturing in July still have a high Forward IV, which means that the possibility of volatility rising again in July cannot be ignored. Considering the Fed's July meeting on interest rates and the European Central Bank will also raise interest rates in July, the crypto asset market is still under significant pressure at the macro level.

In summary, the crypto market may remain low in the short term. The overall performance of investors is relatively cautious, and the macro data is also difficult to support the rebound of crypto-asset prices. However, long volatility seems to be a good strategy choice in the near term. Crypto markets typically experience brief periods of low volatility after delivery; however, due to the liquidity crisis, the impact of event shocks may significantly magnify market volatility, while changes in the macroeconomic environment in July will provide significant potential gains for volatility bulls.