Crypto Options: BTC Volatility Pops!

Weekly Mid-week Crypto Derivatives Market Recap where Imran Lakha of Options Insight gives 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 

• BTC realized Vol hit sub-30 on Friday but has popped back to 35% on the recent upside break to 42k. ETH realized vol also shifted lower last week and has stayed there at around 38% as the breakout was less violent than BTC.

• Implied vols have moved higher with spot as key upside levels were broken stoking fear of more wild moves a FOMO flows came in. Our first main target was 42k on BTC and this level seems to have stalled the momentum for now.

• Volatility carry is still very positive (around 15 vol points) in both assets as the moves have been fairly orderly albeit in one direction. With this much variance risk premium, we would expect gamma sellers to return this week now that the break has occurred.

• Now that we have achieved the 42k target zone, we think selling weekly calls may be safe again with the implied vol popping higher in the front-end. We had covered our shorts on the break of 38k, expecting a move higher. 

Term Structure

BTC

• BTC term structure was slightly higher this week led by the front end.

• GAMMA buckets out to 1-month were up the most, around 5-8 vols but are drifting back fast as BTC stalls around 42k.

• 26Jan24 expiry still contains the "event vol" as the 5-10 Jan window for ETF approval has been established.

• The long end of the curve was also firmer by around 1.5 vols.

ETH

• ETH Term Structure saw a similar pop to BTC this week.

• The front end of the curve was up around 3 points.

• Mar 24 was the least favored bucket as options got rolled from Mar 24 to Jun 24.

• The back end was up nearly 3 points, outperforming BTC long term.

Skew

BTC

• BTC and ETH skew converge once again as BTC skew call skew pulls back and ETH call skew recovers.

• Both assets now have a small call premium in the front end which grows to around 6-7 vols in the long end of the curve.

• It seems that the front-end skew flattening suggests a near-term pause in the price action now that 42k has been reached in BTC.

ETH

• Using any BTC relative strength over the coming month to enter into call switches (long ETH/short BTC) is still one of our favored plays for 2024. We would use far OTM options like 10-15 delta to reduce noise and only have exposure for a large relative re-rating in ETH which we think is being under-priced in the vol surface.

• The fact that ETH long-term call skew is as well bid as BTC confirms the view that the ETH ETF approval scenario is on option traders' radars, but until the BTC story has passed they are trading in line.

Option Flows

BTC

• BTC Options volumes were flat at around $6Bn last week. Before the break higher over the weekend, we saw a large concentration of call spread buying in 29Dec23 expiry, buying 40k and selling 45k strikes. After the break of 40k, we started to see profit taking in 29Dec calls on 40k and 42k in good size which prevented vol from popping too much. Some 26Jan24 42k calls were rolled into Jun24 60k and fresh outright OTM calls bought in

ETH

• ETH options volumes are down around 10% again to $2.5Bn. Last week's flows were mainly call spread buyers in 26Jan24 (2400/3000 and 2600/3200) and Mar24 calls being rolled into Jun24. Since the break higher in BTC, ETH flows are generally still bullish in longer expiries like Jan 24 with little profit taking as the move has been less explosive so far. Still see some GAMMA selling on closer strikes though.

Gamma Positioning

BTC

• BTC dealer gamma positioning went more negative as we broke 40k, but some profit-taking in Dec calls has helped it recover from the lows. Still negative, which can keep things fluid if spot stays in the 40-42k range.

ETH

• ETH dealer gamma moved back into positive and has continued to grind higher. The sale of local gamma is supplying dealers with inventory and there has not been the same influx of client outright call buying that we've seen in BTC. Even the break of 2150 didn't bring much flow with it.

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