June 15, 2023
As investors correctly discounted the likelihood of a rate hike at the FOMC after softer CPI data, markets were static ex-post. With the data-driven reduction in policy uncertainty, implied volatilities (IV) for major front-end options declined with an offered tone persisting during the pre-Fed Asia session. BTC and ETH spot markets traded within tight ranges, ratcheting down 7-day bitcoin realized volatility (RV) to sub-40v, with the market haplessly floundering for further catalysts in anticipation of a renewed downward volatility spiral.
Both major's 25-delta skew have continued to price put IVs higher due to recent uncertainty and price weakness while exhibiting a call skew for longer tenors. That's not entirely surprising on a flow basis, yet it does contravene the established results of this year's positive realized correlation between spot and vol. This positive correlation is still evident in the pronounced long-term skew for OTM calls on BTC, which is materially higher than comparable pricing in ETH. While that can be justified by the deluge of recent overwrites, poor price action on ETH/BTC and Bitcoin's fundamentally resilient status as a better proxy for resilient status amid regulatory uncertainty for the king of L1s. However, the historicals suggest that the distribution of upside outcomes for ETH may, in many cases, actually be more kurtotic than BTC.
Those ruminations are, however, mostly academic at this juncture as apathy abounds for longer tenors and options volumes continue to accrue in the front month of June leading up to a large quarterly expiry. Meanwhile, directionally oriented participants take leveraged positions through options as dealers focus on cleaning up book risk.
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