Bitcoin Traders Prepare for ‘Fat Tails’ Ahead of Trump’s Nashville Conference Speech
Traders in the Bitcoin (BTC) options market are anticipating potential extreme or unusual price movements, known as fat-tails, that could impact returns. Speculation is circulating that Donald Trump’s upcoming appearance at the Nashville Bitcoin conference may involve announcing a more substantial role for BTC within the U.S. financial system.
Activity in the options market, specifically on Deribit and monitored by Amberdata, has revealed a significant uptick in the “butterfly index.” This index measures the volatility of out-of-the-money (OTM) 25-delta (∆25) call and put options, which are listed at a distance from BTC’s current market price compared to at-the-money (ATM) options closer to the spot price. The surge in this index indicates expectations for more extreme market movements.
Trump’s presence at the Nashville Bitcoin conference is seen as a potential catalyst for market activity this week. Greg Magadini, the director of derivatives at Amberdata, noted that derivative markets are aligning with the anticipation of significant developments. The increase in 25-delta wings versus ATM volatility signifies the market’s readiness for higher return distribution Kurtosis or fat tails.
Options serve as derivative contracts that shield buyers from bullish or bearish price swings. Calls protect against bullish movements, while puts provide insurance against price declines. Traders often opt for OTM options when bracing for unforeseen market shifts, thereby driving up the butterfly index.
The term “butterfly” in trading desks’ parlance indicates the degree of change in the volatility smile, representing the volatility profile of options at different strike levels and expiration dates. Expensive butterflies suggest a steepened volatility smile, signaling the potential for unexpected or extreme market events to influence outcomes.
The grapevine suggests that Trump might unveil a more significant role for BTC in the U.S. financial system during his speech at the Nashville conference. Markus Thielen, founder of 10x Research, highlighted the speculation that such an announcement could trigger a substantial surge in BTC’s price.
Various factors, including the anticipated introduction of spot ether ETFs in the U.S., are contributing to the rise in the butterfly index. Traders and market makers are particularly concerned about tail risks associated with the Federal Open Market Committee (FOMC) meeting on July 31 and the impending spot ETFs, which have elevated pricing for BTC’s tail risks.
This week, traders will receive preliminary estimates on U.S. GDP growth for the second quarter of 2024, the Fed’s preferred inflation measure, core PCE prices, durable goods, and retail sales for June. These figures are expected to influence expectations of a Fed rate cut and demand for risk assets, including BTC.
