May 1, 2024

Crypto Options: Downside Risks on the Rise

In this week's recap, Imran Lakha of Options Insight provides the latest insights into BTC and ETH derivatives markets. Explore trends in volatility, option flows, term structures, gamma positioning, and much more to stay informed about the dynamic world of crypto derivatives trading.

This week Imran Lakha walks us through some key points in the crypto options market.

Realized Volatility

Realized vol has fallen off a cliff, taking both BTC and ETH back into positive carry as spot has been drifting lower but without any real velocity.

Short-dated implied vol was also hit hard, with 1-month vol down more than 10 vols, a huge weekly move as call buyers saw premium evaporate quickly.

The key 60k support will need to hold, otherwise, we likely see more aggressive selling and volatility picks back up. ETH is already in the vicinity of 3000, which we know is an inflection point.

This week's macro catalysts are QRA, FOMC, and NFP which all have the potential to move the dollar and in turn crypto markets.

The price of gamma looks like it may have overshot so picking up some options to neutralize downside risk makes sense here.

Term Structure

BTC

BTC term structure shifting lower in near parallel fashion.
May and June expiries hit the hardest, down 12 vols as calls got rolled to longer maturities.
Skew found a put bid in the last leg lower below 62k, leaving only July and longer in call premium.

ETH

ETH term structure also hit lower, but weekly gamma was firm.
June and July were the hardest hit buckets, down around 10 vols.
Back end down as much as 7 vols.
Long end vol slightly offered.
Massive put bid, especially in weekly options to protect against a downside break.

Relative Value

ETH & BTC

ETH/BTC vol spread moved up in the front end again (reaching around 7 vols) as ETH realized vol persistently higher by over 10 vols. The rest of the curve holds a 5 vol premium for ETH.
We continue to see this spread as being positively skewed and would rather own it than be short it at these levels. However, we see the true relative value opportunity in owning ALT coin vol versus large cap vol. For those who can trade OTC and source the liquidity.
The ETH/BTC spot spread still looks set to go lower in the near term but this could be a function of BTC having a stronger rally initially if the broader correction is over.
We are still waiting for lower levels in the spread to re-initiate RV trades that get long ETH calls for later this year.

Skew

ETH & BTC

As implied vol collapsed and markets respected the tight 62-66k range, we had seen skew revert back towards zero.

Overnight, as spot broke down, we saw put skew get lifted again and react quickly to the imminent threat of a downside range break.

ETH skew is trading with a 15 vol put premium in the front-end weeklies, compared with around 10 vols in BTC.

Call skew still exists in the long end, with a July inflection point in BTC versus a September inflection in ETH.

Long term bull thesis intact according to skew pricing, but signally a high likelihood of a downside flush out in the short term before long-term value buyers can step in again.

Crypto Option Flows

BTC

BTC volumes were down 15% to $8.3Bn. Put buying seen in 03 May 58k & 59k strikes. Calls dumped in Sep 90k and 110k strikes. But on the dip seeing some buyers of Jun and Dec 65k and 70k calls. Buyer of Dec 55k/100k bullish risk reversal. Calendars and call spreads are active, as calls get rolled down in May and June or out to longer expiries such as Dec.

ETH

ETH volumes down 30% to $4.25Bn. Vols initially smashed lower on short dated calls selling as weekend move up to 3350 was short-lived.

Protection bought in May 2900-2700 puts. June 3100/2600 put spread bought. 28June24 bullish risk reversal bought.

Gamma Positioning

BTC

BTC dealer gamma became less short as spot dropped and headed toward key dealer long strike at 60k. This long strike is primarily made up of 03 May and 28 Jun expiries, and so may provide some support to BTC's weakness.

ETH

ETH dealer gamma remains long as a function of overwriting flows still dominating shorter-term flows. The 3000 strike is a dealer short strike and may start to dominate if spot breaks below 3000. Fresh buyers of May puts getting lifted may also flip gamma negative quickly on a break lower.

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