Paradigm TBP Episode featuring Amberdata's Director of Derivatives, Greg Magadini!
In this episode, Paradigm has a fascinating market analysis with Greg Magadini, where they dive into the intriguing dynamics between Ethereum ($ETH) and Bitcoin ($BTC). From analyzing the beta of ETH compared to BTC to uncovering the current state of Dvol. Greg provides valuable insights that will leave you informed and enlightened about the crypto market.
We also uncover the overpricing of BTC options and dive into selling straddle. And finally, we discuss the exciting shift in sentiment that hints at a bullish trend and how volatility is making a comeback.
Greg begins by discussing the performance of Bitcoin (BTC) and Ethereum (ETH) during the second quarter (Q2) of the year. He notes that BTC has maintained its outperformance since the SVB banking crisis. Despite slight divergences in spot-ball dynamics, both assets have been relatively correlated historically.
Spot-Vol dynamics refer to the relationship between spot prices and implied volatility. Greg points out that historically, BTC and ETH had similar correlations in terms of spot-vol dynamics. However, there's a slightly positive spot-vol dynamic for BTC and a slightly negative one for ETH, highlighting a deviation from historical norms.
Beta is a measure of an asset's volatility compared to the overall market. Greg analyzes the beta of ETH and BTC in Bitcoin terms. He observes that while ETH generally had a higher beta compared to BTC, the trend shifted in March of the current year, with ETH's beta moving below 1.0. This shift has led to a convergence of volatility between the two assets.
The variance risk premium is the difference between implied volatility and realized volatility. Greg notes that Bitcoin options have been often overpriced, with the variance risk premium occasionally spiking up to 50 points. This indicates that options traders might be paying a significant premium for volatility, and there's potential for trading strategies to exploit this discrepancy.
Greg compares the variance risk premium of the cryptocurrency market with that of traditional markets, highlighting the greater dispersion and potential trading opportunities in the crypto space.
The discussion moves to gamma positioning among market makers. Greg mentions that dealers have been well-balanced in terms of gamma exposure, neither being overly short nor overly long. This positioning enables dealers to react more efficiently to market changes, contributing to a healthier market structure.
Greg considers potential catalysts for changes in volatility. He notes that while the market has experienced a structural decline in volatility, certain events like Bitcoin ETF applications or industry-specific news can still trigger volatility spikes. He emphasizes the importance of timing one's trades to coincide with such catalysts.
The term structure steepness is discussed, focusing on the net backwardation or contango in the options market. Greg highlights that with low realized volatility, implied volatility tends to drag down as expiration approaches. This can lead to negative carry for long volatility positions.
Greg suggests that key price levels, like 30K for BTC, are important for traders to watch. He notes that these levels often drive trading decisions on a Delta basis. He suggests that if BTC were to break above 30K, it could trigger a situation where traders are caught on the short side.
Greg also highlights that macro factors and events in the broader financial world can impact cryptocurrency volatility. For example, geopolitical events or shifts in other asset classes might spill over into the crypto market, affecting volatility.
The discussion concludes by reiterating that while the crypto market has been experiencing lower volatility, there are various factors that could lead to a resurgence in volatility. Greg suggests that market participants need to carefully consider potential catalysts and timing when trading volatility strategies.
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