Volatility Update, 8/4/23

Cryptocurrency majors remain in a holding pattern as the market awaits the response of the SEC to the recent Bitcoin ETF applications or any catalyst to awaken the market from its recent malaise. As one would expect given the lack of direction, Implied Volatility is lower WoW with the back end in ETH getting hit particularly hard. This is most likely a function of heavy upside selling of about $300k worth of Vega in October and December calls. This has contributed to a significant shift in ETH skew back toward the puts. Otherwise, flows were unremarkable this week.

Revisiting 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 5%. (46% vs 51%) Current profit on the trade is ~10%. We recommend adding to the trade at this level for a nice upside play ahead of next April’s halving.

ATM IV Term Structure

• Implied Volatility continued to trend lower this week, with the back end softening as well.
• 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 spread narrowed this week with ETH pressured by back month call selling.
• Contango in both curves has become more dramatic and reduced slightly week on week.

At-the-Money Spot Month Daily Implied Volatility

• Implied Volatility in the front month declined slightly week on week.
• After starting the week 2 vols below BTC, ETH vol rallied Tuesday and remained at a slight premium this morning.
• Futures are unchanged week on week but the intra-day price action and already low vol regime led to a decline of only ~2% in IV from last Friday.

Front Month IV Curves

• 1 month BTC 25 delta puts priced .25 vol over ATM, with 25 delta calls priced 2.75 vols over ATM.
• 1 month ETH 25 delta puts priced 2.0 vols over ATM, with 25 delta calls priced .25 vols over ATM.
• Near at-the-money calls in ETH continue to be out of favor, while BTC calls have regained a bid.
• ETH Risk Reversals are beginning to look attractive at these levels.

BTC & ETH 25 Delta Skew (30 day)

• After a pronounced run up in call skew following the XRP ruling in mid July, ETH skew has reverted and now trades with a significant put premium.
• BTC Skew remains toward the calls after dropping to flat last week.

Notable Headlines

Crypto Options Volume on CME Rose to Nearly $1B in July: CCData (Link)

Coinbase reports narrower loss, Block raises outlook (Link)

Coinbase Moves to Dismiss SEC Lawsuit, Alleging Crypto Falls Out of Regulator's Oversight (Link)

BTC price upside ‘yet to come’ at $29K after Bitcoin RSI reset — Trader (Link)

Largest Crypto Miners Will Benefit Most From Capacity Growth: Bernstein (Link)

US DoJ is concerned about a run on Binance should prosecutors bring fraud charges: Report (Link)

MicroStrategy to stay on Bitcoin course even if spot ETFs approved: Saylor (Link)

Bitcoin stays stagnant ahead of pending SEC spot ETF decisions (Link)

Bitcoin Whale Michael Saylor Might Buy a Lot More BTC (Link)

Changing voter demographics puts focus on Bitcoin for US 2024 election: Grayscale (Link)

OpenAI’s ChatGPT Just Got Smarter: Here’s the Latest on the AI Chatbot (Link)

‍

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.