Crypto Options Insights: Owning Vol Attractive

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

We are back this week with Imran Lakha walking us through some key points in the crypto options market.

Realized and Implied Volatility Trends

Bitcoin Volatility:

• • Realized volatility (RV) has ticked higher, moving from 32 Parkinson RV on a 7-day basis to mid-40s.
  • Implied volatility (IV) was around 45 but has drifted down slightly. The spread between IV and RV (variance risk premium or carry) compressed and turned negative, a rare occurrence where RV exceeds IV.
  • The market has been choppy, but the premium on short-term IV hasn't priced in sustained turbulence.

Ethereum Volatility:

• • A similar trend where the variance risk premium has turned more negative, with realized volatility at 58 and implied volatility at 50. This highlights that Ethereum has been more volatile than expected.

Implied Range and Market Containment

• Candlestick charts indicate that despite increased realized volatility, the market hasn’t significantly breached the implied volatility moves. Intraday swings haven't been large enough to test the high/low ends of the range, showing relative market containment.

Term Structure Shifts

Bitcoin Term Structure:

• • Volatility has shifted downward across the curve. A week ago, a major kink was present due to election uncertainties, with the 57 vol dropping by 4 points.
  • The front end is down by about 3-4 vol points, and the back end has dropped around 2 points.

Ethereum Term Structure:

• • The front-end volatility has decreased more than Bitcoin’s, by 5-6 vol points in shorter-term expirations. A similar pattern was observed, with a 2-2.5 vol drop in the back end.

Relative Value and Skew Analysis

• Bitcoin:
  • The front-end vol dropped from around 10 vol premium to 7 vol over.
  • December expiry sits at 6 vol, while the back end shows a slight uptick to around 7-8 vol.
  • The term structure of skew shows a call skew of 1 vol in the front, increasing to 3-4 vols in the back. There is now a small put skew in the near-term front end.
• Ethereum:
  • A stronger shift towards a put skew, especially in the front end, where there's a 4-5 vol put premium. The long end is holding a 5 vol call premium.
  • This shows a greater focus on downside protection in Ethereum, implying concerns about potential downside risk in the market.

Week-on-Week Developments

• Bitcoin:
  • The market saw a steady decrease in long-end volatility with more front-end volatility. Despite a bounce into the weekend, the front end is still sitting at low vol levels.
  • Skew evolved to show more put skew in the middle of last week during the test of 60K, but has since bounced, though not enough to return to call premiums.
• Ethereum:
  • The skew reflects a preference for put options, with the one-week front-end skew reaching -4 to -5, before bouncing but still holding around -3.

Market Outlook

• The trends indicate that market participants are pricing in a calm period ahead, despite slight choppiness. However, Ethereum traders are positioning for potential downside risks more aggressively than Bitcoin traders.