The merge implies volatility

Julio Rubio

A few weeks ago, the Goerli Ethereum testnet successfully merged to proof-of-stake (PoS). This was the last step missing before transitioning the Ethereum mainnet to the PoS chain. The successful Goerli merger means that ‘the merge’ of Ethereum’s mainnet could happen as soon as September (currently scheduled for September 15th). In this post, I will inspect how the merge affects the Ethereum option market and what the market is expecting.

The merge is a very important and delicate moment for the Ethereum ecosystem. Important because it transitions the blockchain network to PoS, which theoretically will make Ethereum more computationally efficient and, as a consequence, more economically efficient. Delicate because there are many things that can go wrong during the merge, which supposes a risk for the network. Additionally, the merger will solve some unknowns that have been surrounding the PoS transition since the very beginning, like for example, to what extent the gas fees will be affected or if the blockchain trilemma will finally be solved.

One thing is sure regardless of the outcome, the merge is a high entropy event for the Ethereum network and the market. In fact, the market is pricing the event accordingly and has been doing it for almost two weeks after Ethereum confirmed that the merge was scheduled for September 15th.

ATM implied volatility term structure 1 month ago vs today

As seen in the plot above, the at-the-money implied volatility term structure from one month ago differs in shape substantially from the actual term structure. One month ago, the implied volatilities were almost flat for the analyzed period, while yesterday, the implied volatilities looked completely different. This sudden implied volatility “bump” coincides with the merge. Implied volatility increases substantially for the September 30th strike (15 days after the expected merge), and the strikes thereafter to then decrease as it leaves the merge date behind. Interesting is the jump between the September 2nd and the September 30th strikes, which is clearly linked to the merge, and was not priced in one month ago. It is important to add, that the merge is a process that does not happen from one date to another and that the Ethereum foundation expects the merge to be completed in early 2023, which would explain why the volatility “bump” extends into 2023.

Now let us try to capture the moment the scheduled date was announced by plotting the term structure from three weeks ago and the one a week ago.

ATM implied volatility term structure 3 weeks ago vs 1 week ago

The merge date became clearer on July 28th (2 weeks ago) as the Goerli merge was announced. On the plot above, I compared the term structure three weeks ago (just before the announcement) to the term structure one week ago (one week after the announcement). Just before the announcement, the term structure had the hockey stick shape that one would normally expect in normal market conditions, while after the announcement, the volatility “bump” appeared even stronger than the current bump, peaking at 102.53 for the September 30th strike and easing for further strikes. The current eased “bump”

After this quick analysis, here are the main points to be drawn:

  • The options market has been pricing in the merge after the scheduled date was clarified
  • The market expects volatility to increase after the merge
  • The success of the Goerli merge has eased the volatility expectations for the merge, but volatility expectations remain anomalous

How to trade the merge:

Given the nature of the event, I would take a conservative approach and avoid taking directional trades. Instead, I would go for long volatility trades as volatility is the most likely outcome.


This post is intended for educational purposes only and does not constitute the provision of investment advice, and is not intended to do so. The author and Primate Capital specifically disclaim all liability for any direct, indirect, consequential, or other losses or damages arising from any reliance on this article. Trading cryptocurrencies, derivatives, and structured products may involve a high degree of risk and may not be appropriate for all investors. Under some market conditions, it may be impossible to liquidate a position. Investors may suffer substantial losses and even lose the entire amount of their investment.

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