Stablecoin Depeg Risk and Implied Volatility Differences Across Options Markets

Summary

The document examines how the March 2023 USDC depeg affected the relative pricing of Bitcoin options settled in different currencies. Although options on the compared exchanges referenced the same underlying, strike, and tenor, one settled in BTC and the other in USDC. Because premiums, margins, and settlement were paid in different assets, the USDC depeg exposed holders to a distinct settlement risk: dollar-valued option payoffs could be worth less when delivered in a depegged stablecoin.

The article reports a sharp increase in at-the-money implied volatility after news of Silicon Valley Bank’s failure and describes a persistent volatility spread between the venues after USDC recovered toward its peg. The spread was larger at longer maturities, which the authors interpret as continued concern about renewed depeg risk. The comparison illustrates that settlement currency is part of an option’s economic exposure. It is a market episode analysis, however, and does not show that the spread was a risk-free arbitrage or provide a systematic trading rule.

Key ideas

• Options with matching underlying, strike, and tenor can differ economically when their settlement currencies differ.
• A USDC depeg can reduce the dollar value of a payoff settled in USDC.
• The reported volatility spread persisted after USDC moved back toward its peg, including across longer maturities.
• The authors interpret the spread as evidence that traders continued to price in stablecoin depeg risk.
• The episode highlights settlement risk but does not establish a risk-free arbitrage or a repeatable strategy.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.