Crypto Options: Crush in Implied Vols

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 

• BTC realized vol surged into the 80s last week as the long-awaited ETF approvals brought some wild swings in both directions but ultimately ended with lower prices. ETH realized vol outperformed expectations with a very sharp rally as investors rotated immediately to the next narrative.

• Implied vols were crushed as expected, with the "event" passing, and mean-reverted back to more normal levels, anticipating crypto markets to go back to realizing 40-50 vol in coming weeks.

• Volatility carry flipped very negative as realized spiked, but implied fell. This is very typical around events and should not be considered a signal to buy crypto vol at these "cheaper" levels. Remember, implied vol is forward looking vs realized vol is backward looking.

Term Structure

BTC

• BTC term structure collapsed from backwardation to a flat/contango curve as expected.

• Front-end vols were down 10-20 points, with the long end only down 3 vols.

• No April expiry yet, so see any major "kink" for the halving, but Mar/Jun calendars are well supported as the forward vol has a premium.

ETH

• ETH term structure seeing almost identical shifts to BTC.

• Steeper contango than BTC as more premium for longer-dated ETH vol.

• We think being systematically long calendars makes sense, as supply will likely on come in the short-dated expiries and event risk for ETH ETFs will create a persistent term premium.

Crypto Options Skew

BTC & ETH

• BTC skew term structure has shifted deeper into put premium for the front expiries out to 2-month. Weekly skew trades at a 5 vol put premium as hedging activity came in on the break below 45k. Longer dated skew past 3-month still has a call premium which gets as high as 6 vols in the Dec24 bucket.

• Similar story in ETH skew, with short-term put premium and long-term call premium. Levels are similar to where they were last week with 2vol put premium in the front and 5 vol call premium in the back.

• If the narrative has switched to ETH, we may now see BTC put skew stay consistently above ETH in the front end, as investors use these cheaper implied vol puts to hedge their broad crypto beta, but want to capture alpha by leaning long ETH delta, either through spot or longer-term

Crypto Option Flows

BTC

• BTC Options volumes are up 80% on BTC spot ETF approval week to $12.5Bn. Bullish trades, looking for ETF flows to fuel an upside break used the initial dip from 49k to buy 26Jan 50k calls, 23Feb24 50k/60k call spreads. However, as 45k support gave way, flow turned more bearish, and buyers of 19-26Jan 42k puts came in.

ETH

• ETH options volumes are also up 80% to near $5Bn. Very bullish bias to the flow as ETH spot massively outperformed as a huge buyer of 23Feb24 2700/3100 call spread came in on optimism around the narrative shift to an ETH spot ETF on Blackrock mention, although pushed back by SEC. Longer-dated call spreads in Mar24-Dec24 also bought along with Mar24 2300/3500 bullish risk reversals.

Gamma Positioning

BTC

• BTC dealer gamma positioning flipped very negatively after we reversed from 49k back down to 42k as Jan 42k puts buyers took MMs short gamma. This is likely to keep BTC choppy in this zone around 42k as material long strikes are far away at 50k.

ETH

• ETH dealer gamma dipped on the rip higher to 2700 but has since bounced back to small positive as Jan puts got sold and spot drifted back down. If ETH spot can resume its rally, then gamma is likely to flip negative again and can fuel more strength. BTC likely needs to stabilize first.

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