November 1, 2023
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
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Since the excitement of last week's breakout, crypto realized has stabilized. 10d realized metrics still capture the big moves, but if we look at shorter timeframes, we see that realized vol has normalized back to something closer to previous levels around 45%.
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Implied vol on BTC has drifted lower, but not collapsed, as short vol players have been wounded and we have some macro catalysts this week such as FOMC and NFP which could create some volatility. We likely need to see positive volatility carry for a couple more weeks before gamma sellers get more aggressive and return.
- Overall, crypto markets have been insensitive to other risk assets recently, a factor that strengthens the case for more institutional adoption once ETFs become available due to the diversification benefits and track record of higher returns.
Term Structure
BTC
- BTC term structure resetting lower after the big move, as spot settles around 34k.
- Front-end down the most, taking curve back into contango.
- Mar24 holding up well relative to the rest of the curve as full ETF approval is likely to fall in that time bucket.
ETH
- ETH term structure is holding up better than BTC.
- Front end vols down as GAMMA is less effective post-big move.
- Dec23 - Mar24 vol higher as some demand returns for mid-term options.
Skew
BTC
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BTC Skew was volatile last week, as the initial explosion higher in spot saw some profit taking and call skew flattened briefly, but then buyers came back and took advantage of the flatter call skew and entered bullish risk reversals which took call skew back towards its highs. Spot-vol correlation has been positive all year, therefore vol players will likely be happy to own flat call skew even delta hedged. The front-end skew is at around 5 vols and moves up to 9 vols in the back end, call premium everywhere.
ETH
- ETH skew was initially more stable for calls as the explosion higher brought short covering and a sense that ETH still had a lot of room to run, whilst BTC may be close to fully pricing in the ETF story. After a short-lived excursion above BTC call skew, ETH has now settled back below BTC but still remains in call premium across the curve. Around 2 vols in the front, but gets as high as 8 vols in the back end. The options market thinks that longer-dated ETH upside is better vol to own rather than 2023 expiries.
Option Flows
BTC
- Volumes in BTC options exploded another 75% to just shy of $12B which is an all-time record. ITM calls in 24Nov were sold in the 30-34k strike range. 29Dec23 calls were rolled up via selling call spread, with 40-45k the new long strikes. As skew flattened, bullish risk reversals
were entered into in 24Nov 32k/38k and 29Dec 30k/42k structures
ETH
- ETH options volumes were up 90% as large short-cover trades hit the market. The well-known call overwriter closed out a significant portion of short calls in the 24Nov 1650 and 1700 strikes. This was the dominant flow in the market and swamped all other trades. Other notable flows were bullish risk reversals that sold 24 Nov 1650 puts to buy 24 Nov 1900 & 29Dec 2100 calls.
Gamma Positioning
BTC
- BTC dealer gamma positioning has remained short for most of the week and looks to be concentrated on the 03Nov 35k strike. If broken, this may provide some acceleration from dealer hedging and can fuel the next move towards 38k.
ETH
- ETH dealer gamma is still positive, even as shorts got covered on large downside ITM calls. This shows that spot needs to break above 1900 on ETH to move away from long strikes and free spot up to move more in line with BTC.
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