Crypto Insights: Choppy Conditions The Norm

In this week's recap, Imran Lakha of Options Insight provides the latest insights into BTC and ETH derivatives markets. Crypto volatility has declined, with BTC shifting to contango and ETH maintaining a flatter term structure. ETH front-end gamma trades at a 22 vol premium over BTC, reflecting heightened price swings, while skew dynamics indicate strong short-term put demand and long-term call interest. Read more for insights on term structure shifts, skew dynamics, and premium collection strategies.

Market Overview

The latest crypto volatility (Vol) analysis highlights significant movements in both realized and implied volatility across Bitcoin (BTC) and Ethereum (ETH). The market has experienced sharp price swings, with BTC and ETH term structures shifting due to recent events, including macroeconomic news and liquidation cascades.

Realized vs. Implied Volatility Trends

• Bitcoin (BTC):

  • Realized volatility peaked in the low 60s but has begun to decline as large price moves drop out of the dataset.
  • Implied volatility spiked but has since retreated to local lows, maintaining a small positive carry.

• Ethereum (ETH):

  • Realized volatility reached as high as 140 but has now declined to 85, still lagging behind implied volatility.
  • Implied volatility has dropped to 67, indicating market stabilization after last week's extreme moves.
  • Negative carry persists due to recent extreme price fluctuations.

Term Structure Shifts

• Bitcoin (BTC):

  • Transitioned from mild inversion to a contango structure.
  • Front-end vol at 45, increasing to 58 in the back end.
  • Front-end volatility crushed by 8-9 vols, while the back-end declined by 1-2 vols.

• Ethereum (ETH):

  • Front-end volatility dropped by 7-8 vols, while the back-end fell by 1.5 vols.
  • ETH’s term structure is now relatively flat, holding in the mid to high 60s.
  • BTC maintains a steeper contango compared to ETH’s flatter vol curve.

Recent Volatility Events

• Front-end volatility spiked due to recent macroeconomic events, including U.S. tariff announcements.
• Short-dated implied volatility surged but quickly faded back to contango.
• Ethereum’s vol momentarily exceeded 100 before stabilizing again.

Skew Dynamics and Hedging Activity

• Bitcoin (BTC):

  • The skew curve shows a mild put premium of ~3 vols in the back-end, down from 5 vols last week.
  • Front-end call premium remains neutral, recovering from previous put-heavy positioning.

• Ethereum (ETH):

  • Front-end put premium remains elevated (~2 vols), while back-end call skew holds at 5-6 vols.
  • The steeper ETH skew suggests market participants anticipate greater upside potential over time, despite short-term bearish sentiment.

Relative Value Spreads

• ETH front-end gamma is trading at a 22 vol premium over BTC, reflecting the heightened realized volatility in ETH.
• This spread has expanded significantly from 10 vols a month ago, signaling traders’ expectations of continued ETH price swings.
• Market expectations suggest this spread will eventually compress to the 10-15 vol range as ETH stabilizes above $3,000.

Market Outlook

• BTC and ETH vol curves suggest stabilization but with ongoing choppiness.
• ETH’s recent underperformance vs. BTC could lead to a sharp short-term rally (~10% upside potential).
• Once ETH reclaims higher levels, vol compression is likely, bringing gamma spreads and term structure into a more normalized range.
• Options market positioning shows persistent put demand in short-term ETH, while longer-dated calls remain well bid, indicating traders see ETH catching up to BTC over time.