Reduced implied volatility of ether and bitcoin at-the-money (ATM) options signals diminished confidence in the potential for higher prices, according to an analyst.

According to The Block's Data Dashboard, implied volatility (IV) for ether ATM options has dropped from over 88% to a current IV of around 60% for one week, one month and multi-month expires. IV for bitcoin ATM options for the same expiry ranges has also fallen, from a mid-month high of over 77% to a current reading of below 51%.

"The plummeting implied volatility is astonishing" according to cryptocurrency derivatives trader Gordon Grant. He told The Block the multi-week IV drop is consistent with a decline in realized volatility as well.

Traders 'throw in the towel' on higher price expectations

Grant added that derivatives traders who have been selling options contracts, both before and after the recent halving event, have given up on expecting bitcoin prices will make additional, rapid gains, at least in the near future.

"Structured product flows have come to rinse the market with gamma, and aggressive overwriters, into and post-halving, have effectively thrown in the towel on expectations of higher bitcoin prices," Grant said, adding that "term structure of volatility and skew remains, however, comparatively steep, both as a consequence of the aforementioned dynamics and in deference to the potential for a resurgence of variance in the latter half of the year and into 2025."

The shift is both an arithmetic consequence of option pricing models - whereby lower futures basis (the difference between contracts for forward settlement and cash prices) and compressed volatility mean that the risk neutral expectation of bitcoin’s price by the end of December is now much closer to its current value.

In essence, it demonstrates the extent to which traders probabilistic assessment of out of the money, but still 50% delta call options now entails a much lower strike price, as options data shows that versus bitcoin spot at $62,000, they now believe bitcoin is equally likely to reach $75,000 by year end as $100,000 versus a $72,000 spot price a month ago.

Price drop after the bitcoin halving

Grant added that investors waited too long to sell their bitcoin when the market prices were high before the halving event, and as a result, missed the chance to make profits because the market prices dropped afterwards.

Additionally, he said there has been a rush of traders trying to sell options contracts before they expired because the prices for those contracts were much higher before the halving, particularly those that bet on bitcoin reaching $100,000 by December 2024.

"Hodlers of bitcoin appeared late to cash in on cyclically high vols pre-halving and the rush for the exits out of fat premiums that saw those same December $100,000 options go from 20% of spot to now well under 10%, as a representative heuristic," he added.