Ether's volatility surged this week, catching crypto-native options traders off guard and forcing many to adjust their positions for further downside risk.

The shift in the market’s volatility structure, particularly the rapid rise in implied volatility (IV), has significantly altered the landscape for derivatives traders, who are now hedging with a more cautious stance as bearish sentiment intensifies as March approaches.

Cryptocurrency derivatives trader Gordon Grant highlighted that the volatility spike followed Friday's end-of-month expiry and the continued “shortage” of gamma in the ether market, meaning that there is insufficient hedging activity to absorb price movements, exacerbating the recent volatility.

Grant noted that front-end implied volatilities have rolled up sharply, rather than rolling over as they typically would when collateral from expiring options becomes available. “This has continued to persist post today's expiry, with front-end vols rolling up sharply,” he said.

The derivatives trader explained that with implied volatility on one-week options now above 80%, the market is expecting daily price movements of nearly 4% going into March. While this is notable, it’s still consistent with the price fluctuations seen recently, ether's spot price has dipped by over 5% in the past 24 hours.

“This demand for optionality may be prophylactic rather than speculative, reflecting the persistence of a bearish tape,” he continued, suggesting that traders are primarily purchasing options as a safeguard against further declines, rather than anticipating a quick rebound, signaling sustained concerns about a bearish market outlook.

Grant noted that the inversion of the term structure, combined with a rise in implied volatility (IV) from around 60% for at-the-money options to nearly 70% for March contracts, confirms a changing market dynamic. He explained that this indicates a “regime flip towards negative spot-vol correlation” — where volatility now increases as ether's price drops. Additionally, the rise in one-month skews suggests growing demand for downside protection, as traders hedge against further declines. This shift reflects a more defensive positioning in the market, with expectations of heightened volatility and potential losses ahead.

In practical terms, this means crypto options traders, especially dealers who facilitate trades, were unprepared for the sudden surge in volatility. They were "short of vol," meaning they didn't have enough protection against the increasing volatility, particularly in the short term. As a result, these traders have had to quickly adjust their strategies and positions to account for the new, higher levels of market uncertainty and volatility.

“The shift in risk reversals and the repricing of options expectations signal that crypto-native options players, particularly dealers, may have been wrong-way positioned on shorter volatility profiles,” Grant noted.

Grant explained that, in response to the changing market conditions, derivatives traders are increasingly turning to more defensive strategies.

“Given that the market has finally come to place a material premium on out-of-the-money (OTM) puts, it is far more appealing to implement put spreads than outright purchases of downside volatility,” Grant explained. This approach is seen as more cost-effective and better suited to managing the ongoing risk, especially as implied volatility surges higher.

Despite the shift toward downside hedging, questions remain about what could stabilize the market. Grant said that the increasing skew premium for downside puts may need to continue expanding before traders feel confident in betting that ether has reached its bottom.

He added that with the one-month delta-neutral straddle breakevens are now at around 14% and implied volatilities hovering around 66%, traders will be carefully weighing the likelihood of ether stagnating at its current levels or continuing its downward momentum.

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