February 16, 2023

Desk Commentary - Cult .45

In cryptocurrency options, it was a banner brace of days for vol of implied volatility (‘IV’) in the wake of Tuesday’s CPI release.

A vol crush that had begun the night before the print with an inundation of top-of-book offers in near-the-money March calls set the stage for a desperate lurch lower toward cyclical lows in IVs. Blocks of 200+ bitcoin were offered aggressively through mids just under the 47% threshold as btc spot rallied towards the 22,000 level on Monday night. Algos, arbitrageurs, and value players picked away at the carcass, and by the early NY morning, the previous night’s offer had become the bid, suggesting a firmer tone for IVs.

Such a sanguine prognosis was, at least initially, wrong. The 45 day expiry March contract went 45% vol offered almost immediately after 830am, even as spot bounced pertly from a post-release low of ~21600 to ~22300; typically after a material data event, deflation of premiums in the nearest weekly expiry is a natural consequence of greater certainty about the variance of returns of the underlier, particularly in an asset class like crypto. To see ~1.5 month quarterly vols mark down 2 points in such a fashion is, however, less expected. Yet the collapse of the very front of the bitcoin curve from ~60% pre-CPI to the mid 30%s was, in its own way, an equally violent valediction to what may have been a short term cyclical low in implieds, which ricocheted rapidly throughout the Wednesday session as bitcoin surged ~14% from to 22,000 in the morning to almost 25,000 by late evening in a series of erratic, discontinuous jumps, proving the adage that cryptocurrency volatility remains at times a catch-22, requiring if nothing else a cultish devotion to managing risk in the tails.

And that kind of diabolically hard-bottomed recoil for IVs, particularly after a dramatic plunge, is not new. Since peaking in the 3rd week of January, crypto IVs have been in an accelerating downtrend as spot has similarly retraced, with an increasingly serially autocorrelated (and bitcoin-price driven) tendency to the time series. Yet as bitcoin and ether have once again demonstrated a somewhat remarkable resilience in terms of their ability to rapidly make fresh highs, there may the makings of a new impetus for directionally oriented interests to scoop optionality at optically depressed levels.

Sharp flows to take advantage of the lows in vols before the sudden, inexorable move up in spot were few but noteworthy; in particular, Wednesday morning’s tape saw a grab for convexity via 1×3 ratio spreads in June bitcoin (~50 delta vs 10 delta) at a ~10 vol point wing premium, providing exposure to both more vega at higher levels of spot and more vega at higher levels of vol. Meanwhile, same-tenor tight call spreads (roughly 1% of premium for $1000 wide ~20% OTM structures) pinged away in smaller clips, providing something akin to the vanilla replication of a european-style digital payout profile; each of these capitalized on a different aspect of what then seemed to be moribund IVs, and both should continue to offer attractive risk reward if we have in fact entered another upward breakout in spot. Overall, as IVs have made a run back through 50%, and with the curve relatively flat, the imagination of the market has once again come alive, with high-quality names lifting sizable blocks of February and March lower-delta calls and even the appearance of RFQs as far out as December 70,000 strike calls, while more tactical participants have taken the opportunity to overwrite or otherwise take profit on shorter dated lower delta upside which has performed commendably since the start of the week.

Written By

Gordan Grant

Managing Director, Trading and Sales


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