The past week or two there has been a renewed surge of interest and activity in Ether prices and volumes such that Ether futures listed on CME have broken out above the Ichimoku cloud. More notably is that the lagging span has also breached the cloud and may be signaling a change in trend for Ether, which has noticeably lagged Bitcoin in the past period of time. What could be leading to this surge of interest and activity?

The surge in activity stands out not just in an absolute sense but also on a relative basis. In the top chart, which shows the performance of Ether relative to Bitcoin, the relative downtrend has been breached and looks to be breaking out as well. The bottom chart shows the same relative performance on a longer term basis, suggesting some very real change is afoot.

The biggest potential catalyst for this move is ‌ legislation moving through the U.S. Senate on stablecoins. The new GENIUS (and STABLE) stablecoin bills in Congress aim to establish a robust regulatory framework for U.S. stablecoins – defining issuers, reserve standards, licensing and AML/consumer protections. There is an interest from both industry players like Walmart and Amazon, looking to save billions by issuing their own stablecoins and avoiding the fees to network players like VISA, but also from the government that has suggested that having more stablecoins that need to hold Treasuries as collateral will create a new source of demand for the increased issuance of debt coming from Washington, D.C.

Currently 60% of all stablecoins issued run on Ethereum or its L2s, pointing to existing dominance in the DeFi space for the Ethereum network. Thus, Ether is one of the largest potential beneficiaries as regulation of stablecoins would solidify Ethereum’s position as the financial settlement layer of crypto. For institutions already using Ethereum for tokenized assets and payments, the regulation removes a layer of uncertainty. For new players, the network effects of the Ethereum ledger within the DeFi realm will potentially bring new interest, generating more fee activity and ETH burn in the process. 

In looking for a way to play this potential catalyst in the options market, the first step is understanding the timing of events, and then seeing if there is any opportunity across the term structure of implied volatility as well as the entire volatility surface. The Senate passed the stablecoin bill, and next it moves onto the U.S. House, where it may be amended or where the House may use its own version of the bill.  Industry pundits are suggesting that there could be passage of the bill by the end of the summer, sending it to the president’s desk before the end of the year. While implementation would possibly take anywhere from 120 days to up to 18 months, the catalyst would come from the passage of the bill through Congress, sending it to the president’s desk. Knowing Congress takes much of the latter part of the summer off to return to their constituencies, it may make sense for traders to consider looking at expirations beyond the Labor Day holiday.

Looking at the top chart, the October expiration is not only beyond the Labor Day holiday but is also the point on the implied volatility term structure where the curve begins to flatten out. This presents an opportunity to buy into the expiration that has the lowest implied volatility and also gives enough time for the events to play out. While there is more bang for your buck in shorter term options, this risks owning options and having the bill in D.C. take longer than expected to move through the process. Experience may suggest things in D.C. more often than not take longer than expected.

The bottom chart shows the entire implied volatility surface. Noticeable here is that upside options do not appear to have any premium to them relative to at-the-money or downside options in spite of the potential for continued upside should the catalyst for a bill passage play out. Is the market giving traders an opportunity to get long Ether via the options market more attractively than simply owning futures? I think so. 

Taking this relative pricing into account, the structure that makes the most sense to me is to sell an Ether put spread in October, using the premium to buy upside calls for the leverage. If the volatility is low, why am I selling a put spread? Looking at the Greeks, you can see the spread is net long options given the long Vega, Rho, Vanna, Charm and Vonna. In addition, while it is intentionally structured to be premium neutral, this spread does have time decay or Theta, suggesting there is an expectation of movement to benefit on the spread.  Why would a trader consider this structure vs. simply buying futures? There are two reasons this structure may be more appealing than long futures. The first is the defined risk nature of the short put spread. The maximum loss on this spread is the difference between the strikes of the put spread vs. futures where the max loss is not defined. A trader can consider that there is a built-in stop loss essentially, as the maximum loss is defined. The second reason that this may appeal is that there is inherent leverage to the structure because it is premium neutral and potentially more capital efficient in the trader’s account than owning futures. There is risk though, as the upside strike is set at 3300, or about 20% away from current futures levels, meaning by expiration, to pay off, futures need to be much higher. The trade will mark-to-market positively before expiration though, as I will show next.

Within QuikStrike, traders can put in their assumptions for movement of both the futures and implied volatility to see how the structure or spread they have built will respond. The trader can choose to look at profit & loss as I have here, or to look at how each of the Greeks will change, too. As we can see in the chart, whether implied volatility goes higher or lower, as long as futures move higher, this spread will make money‌, as shown from the green color. If implied volatility moves higher, P&L will be higher than if implied volatility moves lower while futures move higher, as shown from the higher P&L in the lower right vs. the lower left of the chart. In fact, P&L is higher for all movement higher and is negative for all futures movement lower, showing the long delta of the spread, replicating a long future position at the time of trade. This matrix functionality within QuikStrike is a very useful tool in helping traders understand how they might want to manage their risk.

I want to end by looking at a couple of other charts of coins that the passage of this legislation also may positively impact but where there has not been as much movement yet. The top chart shows the price of XRP, the ledger that has also issued its own stablecoin RLUSD. With regulation, RLUSD gains legitimacy and compliance, enhancing institutional use cases. The bottom chart is for Solana. With regulated stablecoins becoming mainstream, demand for fast, scalable blockchains like Solana for stablecoin issuance, dApps and DeFi will likely increase. Traders who are interested in playing these ideas in coins that may be consolidating and have not yet broken out, or who may want to diversify their exposure to the catalyst, are able to do so because CME Group now has futures on both XRP and Solana. Growing interest, as seen in volume and open interest data, points to institutions looking to become more active in these coins.

The entire platform at CME Group, from the products traders can use to gain exposure to these legislative catalysts, to the tools a trader can use to analyze and implement, make CME Group the place to go to express views and potentially benefit from growing crypto market possibilities.

Good luck trading!

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