Volatility Update, 7/28/23

Another quiet week in the world of crypto. Despite an aggressive selloff Monday morning that sent BTC -2.8% and ETH -2%, we saw little panic and a lack of follow through leading to more front end implied volatility selling. This was led by near at-the-money call selling in ETH; notably 25k Aug 2000 calls and 21k Sep 2100 & 2200 calls combined. We did witness some March ETH vol buying late Tuesday afternoon/evening, with 21k Mar 1900/2800 call spreads getting bought, supporting longer dated IV. There was a slight pop in short term IV ahead of the FOMC announcement Wednesday, but this was short lived as the Fed raised interest rates by 25bps to the surprise of absolutely no one. With this likely already built into the market, the reaction was limited and the continued downward spiral of front end IV resumed. This low IV presents excellent value for hedgers looking to protect against downside volatility at historically low premium levels. On the back of positive inflation data this morning, both BTC and ETH are currently trading up about 1% at $29,296 and $1,871 respectively.

Keeping an eye on our suggested trade of the DEC/JUN $40,000 call calendar: despite the selloff in futures and a loss on the positive delta, the December IV has fallen more than June over the period. When entering the trade, both strikes were trading ~57%. The June calls now trade at a premium of 4.5%. Current profit on the trade is ~12%. Those with a bullish outlook should feel comfortable remaining in the trade.

ATM IV Term Structure

• Front end WoW Implied Volatility is much lower, with the back end close to unchanged.
• As we have previously noted, ETH IV historically trades at a premium to BTC. The past three weeks, BTC IV has remained above ETH. The curves are currently trading at similar levels across the term structure.
• With a lack of daily price action or news-driven volatility, contango in both curves has become more dramatic.
• Cheapness in August and September IV offers great value for hedgers and speculators alike.

At-the-Money Spot Month Daily Implied Volatility

• For the third week in a row, Implied Volatility in the spot month steadily declined in both products with a lack of significant price action.
• BTC Implied Volatility for the August 28 expiration rallied back above ETH and continues to trade at a slight premium.
• Understandably, given the lack of price movement this week, continued pressure on the front end has driven IV to new historic lows.

Front Month IV Curves

• 1 month BTC 25 delta puts priced 1.25 vol over ATM, with 25 delta calls priced 1.25 vols over ATM.
• 1 month ETH 25 delta puts priced1.75 vols over ATM, with 25 delta calls priced 1.75 vols over ATM.
• Near at-the-money calls in ETH have fallen out of favor and are currently trading at a discount to ATM IV.
• A quiet week and lack of news on the ETF front has led to a flattening of skew in BTC, as well.

ETH Call Spread

• The combination of low Implied volatility and persistent wingy call buying in ETH presents a nice opportunity for a discounted upside play.
• Looking at the September contract expiring 9/29, wingy calls (15 delta and smaller) are trading at 7% or greater premium to closer to At-the-Money strikes.
• Buying the $2,100/$2,500 call spread is an excellent low cash outlay play to take advantage of the wingy call premium for a potential max gain of $355.
• We recommended this strategy at a premium of $45 last week. A lack of upside movement and continued pressure on IV shows the spread worth $35 today. With two months until expiry, those looking for upside exposure should feel comfortable adding at these levels.

BTC & ETH 1 month Implied vs Realized Volatility

• Realized Volatility has decreased significantly over the past few weeks, particularly in BTC.
• The spread between Implied and Realized Vol is much narrower in ETH than BTC.

Notable Headlines

Key Fed inflation rate falls to lowest annual level in nearly 2 years (Link)

Microsoft warns of service disruptions if it can’t get enough A.I. chips for its data centers (Link)

Binance Accuses CFTC of Overreach in Motion to Dismiss Complaint (Link)

Bitcoin Erases Losses, Rises to $29.5K as Nasdaq Gains Nearly 2% (Link)

U.S. Stablecoin Bill Moves Forward Despite Fight from Democrats, White House (Link)

US Senate approves national defense bill that also targets crypto mixers (Link)

New Optimism wallet lets users receive crypto via Twitter login (Link)

Bitcoin and ether hold steady after the Fed raises interest rates: CNBC Crypto World (Link)

Judge imposes gag order on Sam Bankman-Fried as prosecutors allege witness tampering: CNBC Crypto World (Link)

Crypto spot trading markets are 'increasingly concentrated', says Kaiko (Link)

Bitcoin, Ether CME Futures Saw Record Participation From Large Traders in Q2 (Link)

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Appendix: Glossary of Key Terms

Implied Volatility - represents the market's expectation of future price fluctuations and is a key metric employed to price options contracts.

Realized Volatility - also known as historical volatility, this measures past market changes and their actual results.

Delta - a measure of the change in value of an option given a change in the underlying futures contract.

Vega - a measure of an option's price sensitivity to changes in implied volatility.

Gamma - a measure of the rate of change in delta given a change in the underlying futures contract.

Theta - a measure of the rate of decline in the value of an option over time.

Rho - the amount a theoretical option’s price will change for a corresponding one percentage-point change in the interest rate used to price the option contract.

Implied Volatility Curve - a U-shaped graphical representation of the pattern created by the implied volatilities of multiple options contracts with the same expiration date.

Term structure of Volatility Curve - the curve depicting the differing implied volatilities of options with the same strike price but different maturities.

Break-even - the amount of underlying movement the trader needs to capture in hedged P&L via gamma to offset daily theta.

Support and Resistance - key price levels in technical analysis that indicate the levels at which buying or selling pressure is likely to be strong enough to prevent the price from moving below or beyond that level.

Paper - institutional player or producer, a non market-maker.

Call - an option that gives the buyer the right, but not the obligation, to buy the underlying asset at the strike price any time before it expires.

Put - an option that gives the buyer the right, but not the obligation, to sell the underlying asset at the strike price any time before it expires.

Roll - to simultaneously close one option position and open another with the same commodity but a different strike price and/or expiration month.

Straddle - an options trading strategy that involves buying both a call option and a put option at the same strike price and expiration date.

Strangle - an options trading strategy that involves buying both a call option and a put option at different strike prices but with the same expiration date.

Put Spread - an options trading strategy that involves buying a put option at a specific strike price and selling another put option at a lower strike price, both with the same expiration date.

Call Spread - an options trading strategy that involves buying a call option at a specific strike price and selling another call option at a higher strike price, both with the same expiration date.

Iron Condor - an options trading strategy that involves simultaneously buying equidistant out-of-the-money call spreads and put spreads.

Call/Put Calendar - an options trading strategy that involves buying an option at a specific strike and selling an option at the same strike across different expirations.

Butterfly - an options trading strategy that involves buying one low strike and one high strike option and selling two middle strike options.

Iron Fly - an options trading strategy that involves buying and selling three options at the same expiration date and strike price. The strategy consists of buying one call option and one put option at the middle strike price, and selling two options at different strike prices that are equidistant from the middle strike price.

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