Cryptocurrency

Research: Ethereum derivatives traders signal caution ahead of Shanghai upgrade

Shanghai is Ethereum’s next major upgrade and is set to go live April 12.

Once implemented, ETH staked in the staking contract will be unlocked and available for withdrawal. December 2020.

There is a lot of speculation about the impact of the Shanghai upgrade. Some expect spot prices to crash as holders are liquidated. Others believe that easy entry and exit into staking contracts will attract more stake and lead to price stability.

Glassnode data analyzed by crypto slate Ethereum derivatives traders suggest to be cautious on Shanghai upgrades. After Shanghai, however, sentiment eases.

Ethereum – Option 25 Delta Skew

The Option 25 Delta Skew metric looks at the ratio of put-to-call options expressed in terms of implied volatility (IV).

A call option gives the owner the right to buy the asset and a put option gives the owner the right to sell the asset.

For options with a specific expiration date, this metric looks at puts with a delta of -25% and calls with a delta of +25% and nets off to reach the data point. This takes into account the price sensitivity of the option. Ethereum spot price change.

Typically, this metric can be organized by the length of time the option contract expires (1 week, 1 month, 3 months, 6 months, etc.).

The chart below relates to options expiring within a week (short term). It shows puts are currently at a premium, suggesting the market is cautious as the rollout in Shanghai approaches.

Source: Glassnode.com

The 1-month 25 delta skew remains somewhat evenly balanced between puts and calls, indicating calming sentiment post-Shanghai.

Option 25 Delta Skew 1 month
Source: Glassnode.com

open interest

Open Interest by Strike Price refers to the total number of derivative contracts not yet settled, organized by put or call price at which they were exercised.

This indicator is used to measure the strength behind trends in market sentiment in general, especially put or call prices.

The April 7 chart below shows puts in the lead, with the $1,600 strike price far ahead. With over 50,000 contracts.

Open interest by strike price
Source: Glassnode.com

From the opening date of Shanghai towards the end of April, the frequency of puts and calls has flattened compared to April 7th. However, sentiment fluctuated the other way around, with calls at $2,000 being the most frequent choice with around 90,000 contracts.

As such, traders are showing a more optimistic outlook as we enter next month.

Open Interest by Strike Price - April 28
Source: Glassnode.com

funding rate spread

Funding rate is A periodic payment made to or by a derivatives trader, both long and short, based on the difference between the perpetual contract market and the spot price.

If the funding rate is positive, the perpetual contract price will be higher than the marked price. In such cases, long traders pay for short positions. In contrast, a negative funding rate indicates that the perpetual contract price is lower than the marked price and short traders pay long.

This mechanism ensures that the futures contract price matches the underlying spot price.

In this case, the spread refers to the difference between the annualized funding rates of BTC and ETH.

During the September 2022 merger, the annualized ETH funding rate dropped to -282%. This shows that short traders are overwhelmingly bearish and willing to pay long.

To date, the scale of the movement has decreased significantly compared to last September. Yesterday, the ETH trader recorded a slightly positive funding rate of his 0.14%. This suggests somewhat bullish sentiment. Compared to the BTC funding rate of 2.8%, this looks a bit more pessimistic than Bitcoin traders.

Bitcoin and Ethereum Funding Rate
Source: Glassnode.com

Implied Volatility Smile

The Volatility Smile is the result of plotting the strike price and the implied volatility (IV) of an option with the same expiration date as the underlying.

IV increases when the option’s underlying is more out of the money (OTM) or in the money (ITM) than at the money (ATM).

Other options OTMs typically exhibit higher IVs and give the volatility smile chart a distinctive ‘smile’ shape. The steepness and shape of the smile can be used to assess the relative cost of an option and determine what kind of tail risk the market is pricing in.

Comparing the “latest” smile with historical overlays from 1 day, 2 days, 1 week, and 2 weeks ago, we can determine the degree of implied volatility on both sides of the ATM.

The chart below shows that the market is paying a premium for downside protection ahead of Shanghai’s upgrade. The IV is well above 100%.

Volatility Smile - April 7
Source: Glassnode.com

Even after upgrading, the market continues to pay a premium for downside protection. However, the pattern is significantly smoother, with a slight reduction in the right tail, a relatively flat shape, and an IV less than 100% of his across the right curve.

Volatility Smile - April 28
Source: Glassnode.com

spot demand

Exchange Net Position Change (ENPC) measures coins deposited or withdrawn from exchange wallets.

Inflows or positive changes are generally considered bearish, as the main reason for sending money to exchanges is selling. Outflows, or negative changes, are usually seen as bullish, but the main reason for withdrawal is related to wallet storage, i.e. hodling.

Since mid-February, ETH’s ENPC has turned negative, suggesting strong spot demand heading to Shanghai.

Changes in Ethereum Net Position
Source: Glassnode.com

Post Research: Ethereum Derivatives Traders Take Attention Ahead Of Shanghai Upgrade First Appeared On CryptoSlate

Related Articles

Back to top button