Crypto Options: Volatilities Taper Off

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 crypto and the crypto options market.

Realized Volatility

Realized vol has started to roll over as some of the big drops from the previous week drop out of the sample and moves have been more orderly on the way up. BTC 10d realized down to the mid-70s and ETH in the mid-80s.

Short-dated implied vol has also been hit, but not massively because it was already trading low versus realized. For the next 5% higher, we would expect vol to continue to drift lower, but above 70k we may see the spot up/vol up correlation return as investors chase the next leg higher in this bull market.

Both assets remain deeply in negative carry showing that times have been tough for short gamma players, although the last few days have been better.

The lack of geopolitical escalation after Israel's attack late last week has helped risk assets bounce and seen cross-asset vol trade lower. Mega-cap tech earnings will be the main focus for equity investors and will determine risk sentiment.

Term Structure

BTC

• BTC term structure falling back into contango.

• Front-end expiries getting smashed lower post-halving as predicted.

• The rest of the curve shifts 2-3 vols lower.

• Skew flips back to neutral in the front but holds a call premium in the back.

ETH

• ETH term structure also back to contango.

• Similar move to BTC in front expiries.

• Mid-curve holding a better bid with Jun24 up 2 vols.

• Long-end vol slightly offered.

• Put skew fading but still in slight put premium out to May 24. Long end call premium is still there.

Relative Value

ETH & BTC

• ETH/BTC vol spread moved higher in the middle part of the curve 2-6-month expiries but gave back its front-end premium as realized vol came lower on both assets.

• We had flagged last week that owning medium-term ETH vs BTC looked sensible to capture the higher realized on ETH but with better value in May-Jun24 expiries.

• 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

• The rebound from 60k on BTC and 3000 on ETH has led to a flip back to a more neutral skew in the front-end expiries.

• ETH still holds a slight put premium out to 31 May but in BTC we see a call premium everywhere except this Friday.

• Long-dated call skew persists in both assets and reaches as high as 5 vols in March 25. This is the options market's way of saying the bull market is still most likely on for the rest of 2024.

• We flagged call ratios as a smart way to trade the bounce as vol would get hit on a rally. That has certainly been the case so far, but now we wonder how much more room implied vol has to go down.

Crypto Option Flows

BTC

Volumes were slightly higher in BTC last week up to $9.8Bn. Put and put spread protection buying is still active in April-May expiries in the 60k-55k zone. Upside buyers also using April 64k calls and 64k/70k call spreads as well as May 69k calls. Lots of calendars trading at longer-dated upside get rolled down and in on nearer expiry after front-end vols hit.

ETH

ETH volumes are flat at $6.25Bn. We saw two flows in April ETH options with calls sold in the 3100-3200 zone, puts bought at 3100 and below, and 3400 calls bought from the upside. On-screen flow saw a short covering of 26 Apr 3500-3600 calls to sell 31 May 3600-3900 calls. Overwriters rolling out exposure and collecting more yield.

Gamma Positioning

BTC

• BTC dealer gamma has gotten materially shorter in the last week as BTC bounced and is swimming in the middle of a sea of short strikes between 66k and 70k for Friday's expiry. Back below 65k, the positioning would become more neutral again and we have potential for a gamma squeeze on the upside if a suitable catalyst emerges.

ETH

• ETH dealer gamma has been stable the last week and remains small long. The major short strike is 3000 but at 3300 and above, the positioning is more neutral.

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