BTC ETF Priced in? Option Flows Reveals It…

Weekly Mid-week Crypto Derivatives Market Recap where Imran Lakha of Options Insightgives brief yet concise breakdowns of BTC's & ETH's Volatility, Term-Structure, Relative Value, Skew, Crypto Option Flows, and Gamma positioning.

This week Imran Lakha walks us through some key points in the crypto options market.

Realized Volatility

• Over the last couple of weeks, BTC realized vol has been stable at around 40 and ETH around 50 as spot was ranging ahead of key ETF approval dates. We have seen an uptick in both realized and implied overnight as the hype around imminent approval brings new year inflows.

• Implied vols have had a meaningful spike in the break to new highs in spot BTC, taking the front end near 70 vol. ETH vols have lagged slightly despite recent realized outperforming BTC.

• Volatility carry has become extremely positive it is in the 98th percentile, suggesting these implied levels are unsustainable and will likely come crashing down after the news event.

• We think flipping positions into more short or flat VEGA structures makes sense at these levels of spot and vol.

Term Structure

BTC

• BTC term structure in backwardation, as you would expect ahead of the ETF deadlines.

• High point of the surface remains 12 Jan and was up 13 vol points on the week.

• The rest of the curve is also well bid, with even long dated maturities up 4 vol points. We see a VEGA reset coming ...

ETH

• ETH term structure saw similar moves to BTC but not quite inverted yet.

• GAMMA buckets were up 12-13 points.

• Long-term vol was up 7 points and trades significantly over BTC.

• Once again ETH vol outperforming BTC long term vol looks like a sign of ETH optimism for 2024.

Crypto Options Skew

BTC & ETH

• BTC call skew returned fast after the wobble a couple of weeks ago proved not to be too sinister. Weekly skew remains the most sensitive to spot moves as short term put buying flows come in on any drops. The 1-month and longer expiries are uniformly around 3-4 vols for call over.

• The fact that these skew levels are way off the highs that we saw late 2023, even as ETF approval is imminent, shows that options markets think that the news is mostly priced in and a large spike in prices from here is not expected. This has led to new bullish trades being largely call spreads, which has kept the skew relatively contained.

• ETH has been holding a consistent call premium, particularly in the long end, despite lack of breakout in spot. This shows that options players are positioning for the narrative shift after BTC spot ETFs get approved and attention switches to ETH.

• The current pricing of ETH skew is similar to BTC across the curve, but we would expect ETH call premium to be sticky in the long end. The short end will likely find some call overwriting flows given the high volatility carry.

Crypto Option Flows

BTC

• BTC Options volumes understandably dropped last week to around $5Bn, although they would have likely been even smaller without the huge 29 Dec expiry.

• The dip was bought using 26Jan24 42k/50k call spreads. Also saw 26Jan 40k/37k put spread sold. Call calendars active, with buyer of Mar 24/Jun24 60k/70k and sellers of Feb/Mar and Jan/Mar to buy upside but keep VEGA risk down.

ETH

• ETH options volumes popped last week to over $3Bn as 29 Dec was a huge expiry. The biggest clips outside of 29 Dec clean-ups were buyers of 26 Jan 2400/2900 and 29Mar24 2000/3000 call spreads. We also saw protection buying in the form of 29Mar24 1900/1700 put spread.

Gamma Positioning

BTC

• BTC dealer gamma positioning has continued to get less short as 29Dec expiry rolled off and spot is heading up towards 50k which is a long strike for dealers due to call spreads being bought.

ETH

• ETH dealer gamma remains near flat as ETH has not managed to break 2400 convincingly. We do see shorts at 2500, which cold flip the street short gamma if we go higher.

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