Bitcoin Traders Say Options Market Understates Likelihood of Chaotic US Election

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Sep 22, 2020 at 17:52 UTCUpdated Sep 22, 2020 at 18:21 UTC.Judge Robert Rosenberg of the Broward County Canvassing Board uses a magnifying glass to examine a dimpled chad on a punch card ballot Nov. 24, 2000 during a vote recount in Fort Lauderdale, Fla.The November U.S. presidential election could be contentious, yet the bitcoin market is pricing little event risk.

The declining price volatility expectations in the bitcoin market cut against growing fears in traditional markets that the U.S. election's outcome may not be decided for weeks.

Traditional markets are pricing a pickup in the S&P 500 volatility on election day and expect it to remain elevated in the event's aftermath.

"Implied volatility jumps around election day, pricing an S&P 500 move of nearly 3%, and the term structure remains elevated well into early 2021," analysts at investment banking giant Goldman Sachs recently said.

"The U.S. elections will have relatively less impact on bitcoin compared to the U.S. equities," said Richard Rosenblum, head of trading at GSR. Implied volatility distorted by option selling.

Crypto traders have not been buying the longer duration hedges that would push implied volatility higher.

Selling options puts downward pressure on the implied volatility, and traders have recently had a strong incentive to sell options and collect premiums.

In other words, the implied volatility looks to have been distorted by hedging activity and doesn't give an accurate picture of what the market really expects with price volatility.

Despite the explosive growth in derivatives this year, the size of the bitcoin options market is still quite small.

Still, traders are warned against interpreting a potential spike in implied volatility as an advance indicator of an impending price drop as it often does with, say, the Cboe Volatility Index and the S&P 500.

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