Crypto Options: Big Repricing in Front-End Skew

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

• Both BTC and ETH realized vol spiked back into the 50s this week as we saw a sharp sell-off on Monday of around 6% as over-leveraged longs got liquidated as Senator Warren introduced an anti-crypto bill to crack down on illegal use.

• Implied vols popped back to last week's highs after drifting lower most of last week as we traded near 44k.

• Volatility carry which had been positive, has now evaporated to near zero as the realized move was more violent than the implied spike. Provided that BTC stays above the key 38k zone, this correction is likely to be healthy and we see vol mean reverting over the coming weeks if spot can slowly recover and establish a range between 40-45k.

• Using this drop to underwrite (sell puts) against underweight positions makes sense. In a bounce, you could also sell some upside to 29Dec, as it's unlikely that we break that before the ETF announcements due in January.

Term Structure

BTC

• BTC term structure had a pop in the front end on yesterday's sharp sell-off but has already started to revert lower.

• GAMMA buckets (out to 29Dec) are unchanged to small down on the week.

• The rest of the curve has been hit by 2-4 vols, with Feb24 seeing the most pressure.

ETH

• ETH Term structure flattening as the front end caught a bid.

• GAMMA buckets were up around 3 vols as spot dropped.

• The rest of the curve was flat to a small higher, except Feb 24 which was a small lower 0.5 vol Once again ETH vol outperforming BTC long-term vol. (as expected).

Crypto Options Skew

BTC & ETH

• Big repricing of skew this week as a rush for short-dated downside saw put skew come back in the front-end expiries.

• Weekly skew has flipped into around 3-4 vol put premium as investors who are long for the ETF approvals, suddenly realized that crypto could go down. We had seen this short-end call skew flattening last week as a sign of a pause at least.

• Long-end skew remains firmly in call premium still, which is the options market's way of saying, this is just a healthy correction in a very strong uptrend and the upside potential next year is still dominant in traders' perception of risk.

• As we look further out the curve, we see that ETH call skew is slightly greater than BTC right now, which is evidence that the market does see the potential for ETH to steal the limelight at some point next year after ETF approvals are out the way.

• Using this spike in short-term vol and put skew to underwrite (sell puts) for those who want to buy the dip in crypto makes sense. As always sizing is key, as we've just seen how fast positions can be liquidated.

Crypto Option Flows

BTC

• BTC Options volumes spiked by 68% in BTC options to around $10Bn last week. First, we saw profit taking in calls, particularly 29Dec 40k, 42k strikes.

• Straddles were sold on 29Dec at 44000 strikes but offset by 45k calls being bought. 26Jan 42k/50k call spreads bought as well as outright 26Jan 50k calls sold. Protection bought in 15Dec 41/37k put spreads. Mar24 50k calls also sold, helping the vol curve shift lower in the back end.

ETH

• ETH options volumes UP 30% to $3.3Bn. We saw buyers of ETH vol in 29Dec and 26Jan in the strike range of 2400-2600. The calendar buyers continued to roll Mar24 2300 calls into Jun24 3000 calls. The breakdown in spot brought put spread buyers in 15Dec 2100/1900 and 22Dec 2000/1800 strikes. Local strikes in the 2200-2300 range are still better for sale.

Gamma Positioning

BTC

• BTC dealer gamma positioning became even more negative as put buyers came in on 15Dec to protect against further downside. This leaves a lot of potential for volatility on CPI and FOMC macro catalysts.

ETH

• ETH dealer gamma is pulling back towards flat as dealers appear to be short local strike for 29Dec, but long wings against it. This means you would expect ETH to not move as much as BTC, but yesterday's volatility does not reflect that. Bigger forces than options at play it.

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