Crypto Options: Implied Vol Deflates as Spot Bounces

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 bounced by around 20 points on both assets as we saw supports give way and then a sharp V-shaped recovery on last week's dovish macro developments.

Implied vols were around flat on the week as they had been trading at a hefty premium to realized vol.

With the uptick in realized vol, we have volatility carry as negative in both names, but it's very likely that realized will drop off this week with little macro news expected and hence carry should neutralize.

With spot back in the range, we would need a breakout either way to trigger some major options chasing and bring a strong bid back for short term implied vol.

Long calendars look like an obvious trade here given the flat term structures, especially on ETH.

Term Structure

BTC

• BTC term structure is nearly unchanged with only small moves across the curve.

• Weekly vol finished small down (-2vols) whilst 31May-26Jul vols were up 2 points.

• Long-term vol was slightly offered.

• Skew was bid for calls across the curve, particularly in the front end.

ETH

• ETH term structure saw very similar price action to BTC.

• Weekly vol down near 4 points.

• Mid-curve up 2-3 points.

• Long end softer by 1-2vols.

• Calls skew coming back bid but remains in put premium out to 28Jun.

Relative Value

ETH & BTC

• ETH/BTC vol spread continues to stretch higher in the front end as the weekly spread gets to 10 vols, which is more in line with recent realized vol spread.

• From 2-month and longer maturities, the spread still trades at 5 vol premium and there is still scope for this to move higher if ETH sees an out-sized move. For now, it appears that an ETF decision will be delayed, but once a new date is announced, we may see buyers gravitate to longer dates expiries and drive the vol spread higher.

• The ETH/BTC spot spread remains in the doldrums, but at least it's not breaking lower like we feared may happen on a break of 3000 in ETH spot.

• The inversion in the curve makes us like ETH long calendar trades because we don't see the big move happening in May.

Skew

ETH & BTC

• Put skew reached an extreme last week as spot initially broke down but has since reversed sharply at puts were monetized and call buyers returned. BTC front-end skew went from 6.5 vol put premium to currently 1 vol call premium. The back end in BTC has been stable at around 4 vol call premium throughout the turbulence.

• ETH put skew had been even more extreme as can be seen on the chart, and whilst it has reversed, it does remain in put premium for the front expiries. Back-end skew on ETH is still 2.5 vols for calls but this has shifted materially lower over the last couple of months.

• The wild gyrations in front-end skew are symptomatic of a market that is still driven by much speculation and there is not enough structural hedging demand from sticky institutional capital as we see in Tradfi markets. This may change over time as the ETFs bring in more real money allocation and this will likely increase the put bid for medium-term expiries.

Crypto Option Flows

BTC

BTC option volumes are near flat at $8.4Bn. Put buying had been seen on the break down below 60k but this was monetized before and after Powell at FOMC with May 51k and 60-62k puts sold. Call buyers focussed on May-Sep 60-75k strikes but funded purchases by selling far out the money such as Sep24 90k and 100k calls.

ETH

ETH volumes are up 40% to 6Bn. Puts that had been bought for protection were not sold as aggressively in ETH. Largest clips were in 17May/24May call calendars as a way to capture event risk around ETF decision date. Some outright calls also bought in May and June 3900 strikes.

Gamma Positioning

BTC

• BTC dealer gamma remains small short as we trade up toward the main short strike at 65k. Overall, the short gamma position only looks like it would be material if we got back near 70k.

ETH

• ETH dealer gamma back to positive after a brief dip into negative last week as spot ventured below 3000. Long strikes are stacked between 3300-4000 and may provide some resistance for large moves up.

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