Crypto Options: Rush in ETH Skew

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 

• Crypto realized vol collapsed around 30 points last week as the BTC ETF excitement died down taking both BTC and ETH back into the 40s. However, as spot breaks key levels 40k (BTC) and 2400 (ETH) we are seeing an uptick in last day.

• Implied vols had already had a big reset post the event, but have continued to drift lower in BTC by around 5 vols. The bigger vol move came from ETH which saw 10 vol declines on the back of large chucks of upside calls being sold in March and April expiry.

• Volatility carry is back to small positive as realized vol catches down to implied, which is typical options market behavior.

• At this juncture, we think selling BTC gamma looks unattractive as spot is at a key level of 40k) and dealers appear to be short gamma going into Friday's end-of-month expiry.

Term Structure

BTC

• BTC term structure shifting lower but maintaining slight backwardation in the front end.

• Weekly vol holding up as protection buyers focused on 26Jan puts.

• Mid-curve hit hardest by around 5 vols whilst long end was down around 2.5 points.

• No major "kink" in April expiry for BTC halving as it is not a 1-day shock "event"

ETH

• ETH term structure seeing similar shifts to BTC but more pronounced.

• Gamma bucket 26Jan) was firm as spot broke below 2400.

• VEGA under pressure from large call selling flows, taking mid-curve down 10 points.

• Long-term vol premium less extreme in ETH than last week.

Crypto Options Skew

BTC & ETH

• BTC skew term structure has been stable this week, as put premium still exists in the front end (weekly 6-8 vol put premium) due to hedging demand and call premium persists in the long end (Dec24 showing 5 vol call premium).

• Similar to what we have seen in implied vol, the more dramatic moves are happening in ETH skew. Weekly skew has blown out to a 10 vol put premium and we see the put bid out to April which is a 2 vols for puts over. Call premium is still in the long end with 5 vols for Dec24 calls.

• This sudden rush for ETH skew is a function of the call selling flows from overwriters, and the break below key technical support at 2400, which has led to quick slide down towards 2200. The huge level for ETH is 2150, which if broken could lead us back down to 1900. Investors may have got a bit too optimistic on ETH in the near-term and are now showing some nerves and reaching for hedges.

Crypto Option Flows

BTC

• BTC Options volumes volumes down 60% week on week as ETF excitement dies down as spot slips below 40k. As spot failed to rally, long calls were sold out and more protection bought in 26Jan 40k and 29Mar24 30k puts outright. After the vol reset, we saw buyers of 23Feb 44k straddles came in to pick up cheap vol before spot broke lower.

ETH

• ETH options volumes are down around 20% as large overwriting flows returned across the curve. Large clips of VEGA sold in March and April expiries on 2900 calls. 26Jan 2600 calls covered but offset by gamma sellers on local 2400 strike. Even 28Jun24 vol sold via strangles despite the expectation of ETH ETF approvals around that time.

Gamma Positioning

BTC

• BTC dealer gamma positioning stayed negative all week as spot chopped around and then finally broke below 40k. 26Jan appears to be a big short expiry for BTC dealers, which should keep things dynamic into Friday.

ETH

• ETH dealer gamma dipped briefly, but ended higher this week as a combination of fresh overwriters and weekly gamma sellers offset some Jan 2600 call buying. In a rally, we would expect dealers to be short gamma but long VEGA behind.

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