Crypto Options: Beware The BTC Vol Reset

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 

• In the last week, we have seen a material uptick in crypto realized vol as we approach the final deadline for ETF approval this Wednesday. First, we saw a flash crash of sorts last week as leveraged longs were liquidated on rumors of an SEC rejection, but since then we've rallied strongly and regained new local highs near 47k on BTC.

• Implied vols have risen in the front end of the curve to negate the THETA impact on options prices, this is a common behavior around "vol events" where a gap move is expected on a certain date. Volatility carry is therefore still positive due to implied vols staying high. Once the news is out, expect those implied vols to come crashing down into the 50s and be more in line with recent realized vol.

• That fact that we already saw a strong 6% rally yesterday, even before the news is official, bodes well for the long GAMMA players, as no vol reset has occurred yet. ETH realized has been lagging slightly this week as you'd expect.

Term Structure

BTC

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

• Weekly options refuse to decay until the event has passed.

• The rest of the curve is under a small bit of pressure (1-3 vols) as traders prepare for the vol reset.

• We would expect Feb/Mar24 expiries to get hit hard as they don't contain the "halving".

ETH

• ETH term structure also moved into backwardation, but less extreme than BTC.

• Jan-Mar24 part of the curve down around 2 vols.

• Long-term ETH vol holding up well and trading much firmer than BTC, a sign of ETH optimism for the remainder of 2024.

Crypto Options Skew

BTC & ETH

• BTC skew term structure has had some interesting moves this week. Weekly skew flipped into put premium as hedging demand came in, but it hasn't gone too far because put spreads have been favored over outright put protection. The rest of the curve is still in call premium with the back end highest at near 5 vols.

• Similar story in ETH skew, although weekly puts caught a bit more premium as ETH dropped a little more than BTC last week. We think this is more a sign that ETH is expected to be high beta in a general crypto liquidation event. Also, some short-end overwriting flows coming back in ETH which takes down the call premium.

• ETH long-term vol at a premium and positive call skew make call spreads a more efficient trade for long-term bulls. Those willing to pick up more exposure in a sell-off may consider low-cost bullish risk reversals, as the call premium can go higher, as we've seen last year.

Crypto Option Flows

BTC

• BTC Options volumes are up 45% on BTC as spot swung down to 41k and then back up to 47k in a week. Protection buying once again focussed on the very short-term expiries(12-19Jan) to hedge "event" risk. Lots of call activity, ranging from new call spread buying in Mar24 to calendar call spreads 2-way flow. Overall, traders careful to not buy too much VEGA ahead of the event.

ETH

• ETH options volumes dropped by 35% as all the focus was on BTC this week. The 2500 strike was most active, either through outright calls buying in Jan expiries or call calendars being bought in Feb/Mar24 or Mar/Jun24. Similar protection buying flows to BTC in front-end expiries.

Gamma Positioning

BTC

• BTC dealer gamma positioning has remained more balanced this week. The large long strike at 50k is offsetting smaller positions on lower strikes. Dealers would likely prevent BTC from breaking 50k as they hedge long gamma exposure.

ETH

• ETH dealer gamma remains near flat. The upside short positions above 2500 remain, which means ETH could gather momentum on an upside break. We doubt that ETH rally in the short term without BTC also moving higher, given how dominant the ETF narrative has been.

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