AD Derivatives Newsletter: U.S. Election Vol, Inflation, & Crypto Options

USA Week Ahead (ET):

1. Wednesday 8:15 am - ADP Employment

2. Wednesday 8:30 am - GDP

3. Thursday 8:30 am - PCE

4. Friday 8:30 am - Employment Report

Disclaimer: Nothing here is trading advice or solicitation. This is for educational purposes only.

Authors have holdings in BTC, ETH, and Lyra and may change their holdings anytime.

MACRO

This upcoming week is sure to be eventful.

1. The US election is merely 1-week away from Tuesday.

2. The Israel & Iran conflict seems to be heating up, although less than expected over the weekend (more below).

3. Thursday we will have the PCE inflation release (the Fed’s favorite inflation measure).

4. The US employment report on Friday

5. And finally, the FOMC rate decision will be released next Wednesday, right after the election. 

That’s a lot of things going on simultaneously.

Chart: VIX Finviz.com

The VIX closed last Friday at the local high. 

Traders were nervous going into weekend risk given the middle east situation.

Over the weekend Israeli forces conducted a significant aerial assault, called "Days of Repentance," targeting Iranian military assets in response to Iran's prior missile attack on Israel. 

Luckily, the operation involving about 100 advanced Israeli aircraft, carefully avoided striking Iran's oil and nuclear sites to minimize regional escalation

The strike, Israel’s largest to date against Iran, was approved by Prime Minister Netanyahu and involved coordination with the U.S.

Keep in mind that the August 5th “BOJ volatility event” also coincided with Iran & Israel escalation, likely contributing to volatility. 

If VIX moves higher during the week, it would likely provide a great entry for short-volatility reversion post election and into the EOY. 

BTC: $67,675 (-1.2% / 7-day)

ETH :$2,488 (-7.9% / 7-day)

SOL :$176.39 (+10.2% / 7-day)

Crypto Options Overview

Bitcoin implied volatility is pricing in a premium going into this week and the election. 

Chart: BTC IV (vs) RV

We can see the 7-day VRP is about +10pts. This is likely a good short volatility trade for options expiring before Nov. 5th US election. 

Although there are a lot of macro economic events this upcoming week, I’d expect realized to remain low as BTC is likely waiting for the election results to move. 

Chart: BTC Term Structure W/w

Looking at this from the term structure perspective, we can see that the large move higher in IV week-over-week is isolated to maturities <30-days. 

Again the post election premium seems reasonable, but everything expiring before the election is likely a decent fade. 

Chart: DJT Stock (ThinkOrSwim)

The market continues to price a Donald Trump election victory. We can see the DJT stock moving +325% in the past month. 

It’s almost certain that this price action is a reflection of election expectations. 

Chart: BTC ∆25 RR-Skew

As highlighted in last week’s newsletter, we also believe that the BTC options skew has been moving in tandem with Trump election expectation. 

We continue to see a convergence to higher Call skew (vs) Puts, currently pricing a premium of about +4% points. 

Chart: BTC (vs) ETH Term Structure

Relative volatility could be an interesting trade for the election (something we’ve mentioned in the past).

Given the solid trend lower for ETH prices against BTC, I’d expect the price action for higher BTC to outperform ETH. 

Chart: ETH/BTC Daily Prices

This means traders could buy Bitcoin call upside, financed by selling ETH call upside. 

Paradigm's Week In Review

Paradigm Top Trades This Week

Weekly BTC Cumulative Taker Flow

Weekly ETH Cumulative Taker Flow

BTC Cumulative OI

ETH Cumulative OI

BTC

ETH

Derive: In the Markets

• 30 day vol risk premium for BTC has widened to 15% (for ETH this is 10%) while one month ago the vrp was near 0 for both assets. This could indicate a growing desire (especially for BTC) for options, resulting in a premium. The relatively larger premium for BTC over ETH could indicate the market pricing in more volatility for the former in the lead up to the US election. 
• 30 day 25 delta skews have held relatively steady (and positive) the last week for BTC and ETH while 7 day skews have dropped. This indicates relatively bullish sentiment for expiries post election. 
• For ETH and BTC, put OI stands about 2.6x more than call OI - this seems to be the result of a large amount of recent put selling. This could indicate bullish sentiment as people want to generate yield with the expectation of a rally.

Also on Derive

• sDAI spot markets are now live!
• 8 new perp markets are live (AAVE, BNB, DOGE, ARB, NEAR, PEPE, SUI, TIA)
• Derive vaults have now yielded $1.33M in yield for LRT stakers. 
• New all time high of active daily traders (1170).

Opyn Overview

Crypto markets took a nosedive this week, ending the week negative. ETH ended the week at -6.47% and oSQTH ended the week at -14.49%.

Volatility

oSQTH IV is 134.53% vs. its ref vol. at 64.58%.

Crab Strategy

Crab saw losses this week ending at -0.18%.

Opyn Twitter: https://twitter.com/opyn_

Opyn Discord: https://discord.gg/46PCtAS2 

AMBERDATA DISCLAIMER: The information provided in this research is for educational purposes only and is not investment or financial advice. Please do your own research before making any investment decisions. None of the information in this report constitutes, or should be relied on as a suggestion, offer, or other solicitation to engage in, or refrain from engaging, in any purchase, sale, or any other investment-related activity. Cryptocurrency investments are volatile and high risk in nature. Don't invest more than what you can afford to lose.