A DeFi bull run might take $400 Ethereum options traders by surprise

September’s Ethereum call options data are not in favor of traders expecting $400 ETH but a DeFi bull run could change this.

Ether (ETH) price gained 14% from its Sept. 6 low at $320, but this month's futures and options expiry is less than two weeks away. As its price is still pinned below $400, this raises the question of exactly how confident are derivatives traders of a 9% recovery to $400?

By analyzing options model pricing, investors can easily conclude that traders are pricing in the 34% odds of Ether reaching $400 or higher. Still, the Black & Scholes options model main issue is heavily dependent on the number of days until expiry.

The odds for the same $400 level on Nov. 27 rise to 52%, regardless of how optimistic investors are for the Ethereum 2.0 launch date or the altcoin’s growing use in decentralized finance platforms.

Ethereum’s volatility leaves room for surprises

Volatility is the central indicator of intense price swings, although it does not infer a positive or negative direction. 

Historical volatility exclusively measures past movements and is hardly impacted by the current mood within the market. On the other hand, implied volatility relies solely on current market conditions.

ETH 3-month options implied volatility

ETH 3-month options implied volatility. Source: Skew

The above data show how Ether’s implied volatility started an uptrend in late July, and now it hovers slightly above 5% per day. Although volatility does not infer direction, an 5% average daily move certainly leaves a 10% weekly gain within the realms of possibility.

To better assess whether these $400 options for the next couple of months are still worthy, a trader would need to look backward. 

Analyzing weekly moves from the previous five months is a good start as it captures a substantial amount of recent real-life examples.

ETH USD weekly

ETH USD weekly. Source: Investing.com

Not only is a weekly 10% gain feasible, it has happened four times over the previous five months. This does not invalidate the Black & Scholes options pricing model. First, there are almost two weeks until the September expiry. Second, there have been weeks of negative performance during the last five months.

What needs to be clear is that cryptocurrencies have moderate to extreme volatility, so no one should discard a 10% gain in two weeks due to options pricing.

In mid-July, when the 3-month implied volatility was at 3.5%, a 10% upside call option with 75 days until maturity traded at $19. That was equivalent to 8% of the $244 Ether futures price back then.

A similar call option today for Nov. 27 with a $400 strike goes for $53, equivalent to 14% of the $372 Ether futures price. The primary reason behind such an increase is that implied volatility rose to the current 5.2%.

This change discourages traders from building bullish positions using options, and may create the wrong impression that the market became bearish. 

Ether options primary risk indicator remains bullish

Traders should look at the 25% delta skew to assess how today’s traders are pricing in the recent 33% drop from $485 top after Sept. 1.

Whenever the market is unwilling to take downside risk, the indicator shifts negatively. On the other hand, a positive 25% delta skew indicates traders are demanding less premium (risk) for upside protection.

3-month options 25% delta skew

3-month options 25% delta skew. Source: Skew

The above chart shows OKEx Ether contracts long-to-short ratio currently at 0.96, while Binance stands at 1.02. This figure corroborates with Ether options' 25% skew data, signaling that recent excessive optimism has been scaled back.

Top traders have reduced their positive expectations

As Ether broke the $340 resistance in August, optimism quickly reflected traders' net long and short positions. This movement seems to have faded after the recent price correction, but the long-to-short ratio on major derivatives exchanges is far from bearish.

Ether contracts Long/Short Ratio

Ether contracts Long/Short Ratio. Source: OKEx

The above chart shows OKEx Ether contracts long-to-short ratio currently at 0.96, while Binance stands at 1.02. This figure corroborates with Ether options 25% skew data, signaling that recent excessive optimism has been scaled back.

Possibly, the odds are not in favor of the $400 options holders for Sept. 25, but the outlook certainly looks positive after yesterday's DeFi tokens managed a healthy 19% bounce.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.