How Bitcoin and XRP Traders Are Positioning Themselves in a Choppy Market Environment
In a volatile cryptocurrency market, major traders are adopting different strategies. Bitcoin investors are favoring non-directional options like strangles and straddles to bet on significant price swings without a clear direction, as indicated by recent trades on Deribit. In contrast, XRP traders are shorting strangles, betting against increased volatility. Block trades, usually executed by institutional investors, minimize market impact and allow speculation on volatility rather than price direction. Deribit's BTC options market remains dominant with over $44 billion in open interest, while the XRP options market, though smaller, has attracted attention with substantial trades like the recent short strangle bet. Amid global macroeconomic uncertainties, such as U.S. government issues, XRP's implied volatility has surged above 80%, though some traders believe risks are now priced in. These positions highlight the complexity and risk tolerance required for such strategies in the cryptocurrency market.
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Divergent Approaches in Crypto Trading
In a market characterized by choppy price action and uncertainty, large traders of major cryptocurrencies are quietly taking divergent paths. While bitcoin (BTC) investors brace for volatility with non-directional option plays, some XRP traders are betting on the opposite, as reflected in recent block trades on crypto options exchange Deribit.
Non-Directional Strategies in Bitcoin Options
Over the past week, strangles accounted for 16.9% of bitcoin option blocks traded on Deribit, while straddles made up 5%. Both strategies are non-directional volatility strategies, aiming to profit from significant price movement regardless of the direction.
- A strangle involves buying out-of-the-money (OTM) call and put options with the same expiry but different strike prices.
- A straddle entails purchasing at-the-money call and put options, offering greater sensitivity to volatility but at a higher cost.
While these strategies bet on volatility, they can lose the premiums paid if the anticipated volatility does not materialize. Deribit CEO Luuk Strijers noted that these BTC strategies collectively represent over 20% of block flows, reflecting the market's grappling with uncertainty and expectation of significant price shifts.
Why Non-Directional Strategies Are Popular
Block option trades — large, privately negotiated transactions conducted outside the open market — are typically executed by institutional investors to minimize their impact on price. The preference for these non-directional strategies highlights why the crypto options market has been flourishing. It allows traders to speculate on volatility rather than price movement, facilitating efficient risk management.
Deribit's BTC options market, with a notional open interest of over $44 billion, provides one of the most liquid venues for hedging risk and speculating on volatility. Meanwhile, the ether (ETH) options market, worth over $9 billion, exhibited a bias for a put diagonal spread, characterized as a directional-to-neutral strategy benefiting from time decay and implied volatility.
Overview of XRP’s Rangebound Bet
Deribit's XRP options market, while smaller with a notional open interest of $67.6 million, has seen trades large enough to draw market attention. For example, on Wednesday, a short strangle trade on XRP was executed via Paradigm’s OTC desk and booked on Deribit, involving:
- Selling 40,000 contracts each of the $2.2 call option and the $2.6 put option.
- With an average premium of 0.0965 USDC for 80,000 XRP.
A short strangle is a bet on reduced volatility, effectively wagering that macro risks are already priced in and XRP will remain rangebound between $2.2 and $2.6. Lin Chen, Deribit’s Asia business development head, emphasized that XRP’s at-the-money implied volatility surged above 80%, reflecting broader macro risks, including the U.S. government shutdown and monetary policy expectations.
Risks Associated With Short Strangles
Shorting a strangle comes with significant risks. If volatility unexpectedly surges, it can result in unlimited losses as the underlying price moves sharply beyond the strike prices. Because of this, short strangles are high-risk trades typically avoided by retail investors, unless they have:
- Robust risk management
- A high tolerance for potential drawdowns
Despite these risks, some traders find the yield on selling the strangle particularly attractive, especially when they believe macro risks are fully priced in.