As $2.3 billion worth of options contracts tied to ether (ETH) approach expiry on Deribit, the leading crypto derivatives exchange, the market is witnessing a narrow spread between the forward-looking 30-day implied volatility index for ETH and bitcoin (BTC). Deribit attributes this negative spread, indicating relative stability in ether, to increased institutional interest in "overwriting" or selling ether call options. Overwriting involves selling overvalued call options against long-term buy-and-hold positions, generating additional income on top of spot market holdings. This strategy has significantly impacted ETH implied volatility, setting the stage for potential market shifts around the upcoming expiry.

Since the start of the year, there has been a notable increase in reflective overwriting flows in ether, resulting in lower ETH implied volatility. Traders' expectations for price turbulence, as indicated by implied volatility (IV), are positively impacted by options demand. With the June contracts set to settle this Friday, traders engaging in overwriting may choose to roll over their positions by squaring off short positions and moving them to the July or September expiry. This potential rollover activity could lead to significant shifts in how IV is priced in both the bitcoin and ether markets.

Deribit's Chief Risk Officer Shaun Fernando described ETH as witnessing substantial institutional selling activity in call options, earning traders the nickname "ETH overwriters" or ETH volatility selling whales. Notably, this has resulted in the ETH implied volatility index (DVOL) being lower than that of BTC. As these substantial positions near expiration, volatility could experience captivating shifts as participants consider rolling over their positions.

The ETH-BTC DVOL spread currently stands at -2.5, reaching a three-year low of -7.8 last week. Rollovers have the potential to influence this spread. However, over-the-counter liquidity network Paradigm predicts that the price of ether will likely remain around the $1,800-$1,900 range. Paradigm notes that dealers have predominantly taken long positions due to the aforementioned overwriting flows, resulting in a magnet effect on spot prices for the $1,800-$1,900 strikes.

While the narrowing of the volatility spread between ETH and BTC suggests relative stability in the ether market, the upcoming options expiry and potential rollovers by overwriters could introduce increased volatility. Traders will closely monitor these developments to gauge potential price movements and market dynamics in the coming days.