Volatility Update, 7/21/23

Following a run up to yearly highs last Friday morning, the market lost momentum and failed, pulling back to the $30,000 and $1,900 levels in BTC and ETH, respectively, and remained there through the weekend. Despite the bullish atmosphere surrounding crypto markets recently, this week saw more consolidating amid low volumes, perhaps building a base ahead of another test of the highs. Call skew remains elevated, lending further support to a potential move higher.

Implied Volatility began the week around unchanged but steadily trended lower as the market drifted sideways. As mentioned, interest in upside calls persisted this week, with paper notably buying the December BTC 40,000 calls as well as the 35,000/45,000 call spread. ETH flows continued to support the positive call skew, with buyers of the September 2200 calls and March 2100s.

Quiet flows continued throughout the week amid the tight ranges in the futures. With a lack of recent market movers, eyes may begin to focus on the upcoming SEC response to the recent Bitcoin ETF filings, due by August 13. Historically low Implied Volatility presents some actionable hedging or speculative trades over the next few weeks leading up to that response. Two such trade ideas are explained later in the report.

Revisiting our trade suggestion from 2 weeks ago, buying the DEC/JUN $40,000 call calendar: this has performed quite well, appreciating $375, a gain of 18.75%. 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 2.75%. Those with a bullish outlook should feel comfortable remaining in the trade.

‍

‍

ATM IV Term Structure

• Week on week Implied Volatility is much lower, notably in the front of the curve.
• As noted in the past, ETH IV historically trades at a premium to BTC. The past three weeks, BTC IV has remained above ETH. With the exception of the front month, this premium remains in place.
• 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

• Implied Volatility in the spot month steadily declined in both products with a lack of significant price action
• ETH Implied Volatility for the July 28 expiration rallied above BTC 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 historic lows.

‍

Front Month IV Curves

• 1 month BTC 25 delta puts priced 0.75 vol over ATM, with 25 delta calls priced 2.5 vols over ATM.
• 1 month ETH 25 delta puts priced1.5 vols over ATM, with 25 delta calls priced 3 vols over ATM.
• Calls in ETH remain resilient despite downward underlying price movement.
• As anticipated, IV trended lower as the futures drifted toward $30,000 and $1,900 respectively.

Hedging Bitcoin length

• With Implied Volatility trading at historic lows, now is the ideal time for miners or bitcoin holders to consider a hedge against downside price movement.
• There is slight negative skew in the puts, which means the Implied Volatility is lower than that of the At-the-Money options.
• Buying the $27,000 put expiring 8/25 offers over a month of downside protection for $390 as the market awaits the SEC response to the recent Bitcoin ETF applications.
• Given the current low IV environment, we don’t recommend call selling for yield as an effective strategy.

ETH Call Spread

• The combination of low Implied volatility and strengthening call skew in ETH presents a nice opportunity for a discounted upside play.
• Looking at the September contract expiring 9/23, wingy calls (15 delta and smaller) are trading at 5% or greater premium to closer to At-the-Money strikes.
• Buying the $2,100/$2,500 call spread for $45 is low cash outlay and an excellent play to take advantage of the wingy call premium for a potential max gain of $355.

Variance between Implied and Realized Vol Narrowing

• Expectations vs. Historical Data: Implied volatility represents the market's expectation of future price fluctuations, while Realized volatility is based on historical price movements.
• Implied volatility has historically traded at a premium to Realized, but this spread has narrowed significantly in the past 6 months.
• In a sign of maturation and market efficiency, the variance +/- continues to narrow over time.

BTC & ETH Fail to Achieve New Highs

• Enthusiasm waned in the past week after both BTC & ETH futures rallied to new YTD highs.
• These strong rallies failed against significant resistance at $31,350 and $2,000, respectively.
• Despite failing to hold these levels, the market remains within 5% of new highs and continued positive developments in the space, particularly progress along the Bitcoin ETF front, may provide the catalyst needed to push the markets upward.

Notable Headlines

• Deadlines for U.S. Spot Bitcoin ETF Approvals Come Into Sight (Link)
• XRP price can fall 40% by September — Fractal analysis (Link)
• Fed Dramatically Speeds Up U.S. Payments With FedNow, but Downplays Any Tie to CBDCs (Link)
• The US Department Of Justice Will Double Its Crypto Enforcement Teams To Combat Crimes (Link)
• OpenAI, Google, Microsoft Promise White House to Keep AI Safe (Link)
• Liquid staking claims top spot in DeFi: Binance report (Link)
• BlackRock's spot Bitcoin ETF approval is 'a long shot,' analyst claims (Link)
• North Korean hackers breached a US tech company to steal crypto (Link)
• Bitcoin’s Sideways Churn Sends Volatility to a Six-Month Low (Link)
• Weekly Market Wrap: Bitcoin falls below US$30,000 as institutional interest in ETFs fails to lift markets (Link)
• SOL, XRP Lead Slide in Crypto Majors as Bitcoin Lingers Below $30K (Link)

‍

‍