Is crypto becoming more institutional? Evidence from options
Crypto winter and the declines in trading volumes in 2023 have accelerated a long term decline in implied volatilities in Bitcoin and Ethereum, bringing the crypto majors closer than ever to other macro assets like Gold. The increasing gap between weekday options and weekend options, the so-called “weekend effect”, suggests that some of the decline is a sign of maturation: the space is becoming more institutional, professional, and focused on prices during the week.
What is the weekend effect?
The “weekend effect” in options markets is the observation that an option with a Sat, Sun, or Mon expiration is less expensive than a similar option that expires on a weekday, controlling for how much time there is left before expiry. In other words, if today is Friday, options that expire on Saturday are worth a lot less than the same options that expire on Tuesday if today were Monday.
This is so prevalent in traditional markets that are closed for trading on weekends that many volatility rules of thumb annualize based on the number of trading days in a year (252) rather than the number of calendar days (365). Since many traditional markets do not trade on the weekend, the weekend effect is typically interpolated from Monday options or using a sophisticated day-counting strategy.
Of course, crypto is different. Because much of crypto’s early history was driven by retail interest trading in free time, weekends often were the times of the most volatility. As such, crypto options had much less measurable weekend effect (there was less gap between weekday and weekend options).
Over the past 18 months though, we’ve seen an incredible compression of vols for both BTC and ETH. Whereas the median overnight BTC implied vol for a weekday was only 3.7% larger than an overnight expiring on a weekend, it is now 12.9%.
The increasing gap over time suggests options market makers are increasingly pricing expectations of quiet weekends in crypto. Likewise, this presents an opportunity to buy significantly cheaper options for traders who want to play on events over the weekend.
