London-based crypto research company Skew has attempted to answer the big question about the forthcoming Bitcoin halving. According to the company's research, not all values of future volatility has been priced in, contrary to what numerous critics say.
6/ The BTC options market tells us an interesting story: there is no kink in the implied volatility term structure for the relevant expiry (Jun20). This means the options market does NOT anticipate any increased volatility around that time! pic.twitter.com/nYr12pi3Ga— skew (@skewdotcom) January 6, 2020
How options traders predict the future
In a series of tweets, Skew explained how to determine whether a certain event is priced in or not by taking a look at the asset's implied volatility, which resembles a "kinked" curve.
Implied volatility (IV) is a term inherent to options that reflects the market's expectations about a certain asset. In layman's terms, it shows how turbulent the market will be in the future. IV is also a handy tool for calculating specific price targets for traders but, of course, these predictions will not necessarily turn out to be correct.
Options traders can simultaneously go short and long on Bitcoin at the same strike price with different expiry dates, which is known as the calendar spread strategy. In such a way, traders can turn a profit from time decay (the tendency of options prices to decline with time).
5/ Using forward variance, one can even calculate fairly precisely the implied move on the day of the event, based on a number of assumptions. This means traders can trade the event's "implied move" by using option calendar spreads.— skew (@skewdotcom) January 6, 2020
An early halving rally?
Skew points to the fact that there is no kink in the implied volatility during Q2, which means that the Bitcoin options market doesn't anticipate any significant moves after the halving event. However, traders do expect some volatile moves in March, right on the verge of the halvening.
Hence, there is a chance that it could be another "buy the rumor, sell the news" that will resemble Litecoin's impressive price rally in Q2 2019 that completely evaporated after the actual halvening.