May 18, 2023

Desk Commentary - Safe Arbours

Coming into midweek, 10 day rolling realized volatility had plumbed the lower 20s for bitcoin and ether amidst a sustained bout of broad apathy as month-end IVs were given down to the mid 40s and mid curve wings clung to 10v over atm strikes for both majors.

If BTC and, to a lesser extent, ETH are now macro assets, then the lack of a macro catalyst may prove problematic for an exit from the rut in which markets have been mired since the end of the first quarter. Thus far, aside from a banking crisis deferred, numerous big picture concerns, from wars to mass migrations to a hoped-for prospect of a Fed pause, have not proven decisive.

Instead, technical thresholds, government sales of seized tokens, and perhaps most critically at present, the search for static return enhancement have dominated. So, while the market awaits something truly new and jarring, the negative drift time process for crypto IVs, much like the VIX, continues unchecked.

That dynamic saw ETH June ~ 30 delta risk trade sub 47% with an overabundance of fresh offers top of book to kick off the midweek Asian session, which set a heavy tone for premiums that carried over into the New York open, with another 10,000x units of June calls offered out aggressively through mids as spot probed session lows.

Yet all is not so dreary even as ATM strike risk in majors proves near toxic, with a sizeable reinvigorated series of alt coin RFQs over the last week led by LTC and LDO for which the Genesis trading desk saw its first option prints in over six months. The latter, a leading LSD token, surged some 30% in anticipation of its V2 launch, pushing paid prices for 26 May IVs from the upper double digits well into the mid triple digits. Directional narratives around the upcoming LTCUSD halving similarly drove upside interest in that pair, with calls trading at IVs nearly double those of ETH and BTC, in a faint omen of the capacity for more exuberant markets to potentially prevail once again. Not surprisingly, LDO and LTC were stellar outliers on the day, pumping ~5+% even in a down-market.

Those moves, in some sense, foreshadowed the sharp bounce in spot back through 27000 and 1800, which followed a curious strip of new taker activity as blocks of put trees (September for ETH and July for BTC) were sold at above-average concessions of spread. This suggests the importance of market timing vis a vis delta risk rather than volatility driven considerations.

In the best spirit of high alpha, low edge flows, those tickets demarcated the turn of the tide in the trading tape as Wednesday’s flows flipped inexorably bullish, and spot caught a surreptitious bid that was not sated until prices were driven over 3% off the lows. That reversal in risk was compounded by the venturi effect of a collapse in IVs that saw gamma spike around Friday pins, with futures markets chasing short liquidations and delta-hedgers potentially stopping into length as momentum quickly carried prices 1.5% beyond the figure.

As IVs stare down cyclical lows and majors look to have staved off another thwarted assault on trend support, similarly sloppy price action into Friday expiry could be in store if correlative risk assets find their feet. However, whether any such animal spirits could be sufficient to hoist volatility higher depends on external catalysts for the time being.

Written By

Gordan Grant

Managing Director, Trading and Sales


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