Merge, the long-awaited connection between Ethereum‘s existing execution layer and its Proof-ofStake consensus layer will be completed. Investors are buying to prepare for a sustained pump since this milestone in Ethereum’s development is being considered.
Analysing the options market, however, suggests that the Merge could be a “buy-the-rumor, sell-the news” event.
The Volatility Smile
The Volatility Smile chart is a graph of strike price and implied volatility for options with the same asset and expiration dates.
Implied volatility increases when an option’s underlying asset is out-of-the money (OTM) or in-the money (ITM) compared to at the-money(ATM).
Option further OTM have higher implied volatilities. Volatility Smile charts often show a “smile”. This smile’s shape and steepness can be used to determine the relative cost of options and what type of tail risk the market is pricing.
The legend below refers to historical overlays. It shows the shapes of smiles 1 day, 2 days and 1 week ago, respectively. It could be that the market is pricing in a lower tail-risk by allowing ATM implied volatility values for extreme strike to be lower than historical overlays. The market sees extreme moves as less likely than medium moves in such cases.
The Merge is scheduled to take place on Sept. 15. There is a huge demand for call options that expire at the end September, which is a bullish factor for price. Prices above $10k-$50k have a higher implied volatility, which means investors are willing and able to pay a premium.
Ethereum options require that you tail off post-Merge
Volatility of options that expire in October is characterized by a dramatic change in the Volatility smile
Below is a chart that shows a steep decline and a flatter structure. This suggests a lower demand for Ethereum options once the Merge goes live.
However, implied volatility is still high in the left tail, which means that traders will pay more for put options following the Merge.
The two charts together indicate that options traders are selling news and buying rumors.
Research: Option market analysis suggests that Ethereum’s Merge could be a buy rumors, sell news’ event CryptoSlate.
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