April 27, 2023

Desk Commentary - Tapeworm

The discretized, fat-tailed distribution of cryptocurrency returns manifested itself once more to punctuate the second and third days of the last trading week of April with a dizzying display of lurid leaps and double-digit descents that have muddied the year’s technical picture and left participants wondering just how incurably volatile could trading get ahead of May’s FOMC.

After last week’s lumbering elephant walk $2000 lower from the $29,000 trendline break, crypto majors found themselves running into resting, if restive, impregnable bids at 27,000 BTC and 1,800 ETH in Tuesday’s session. The market turned tail anon, teleporting 10% higher on news of asset disposals and another potential rescue operation at First Republic Bank as the lingering fragilities within certain pockets of the U.S. banking system became once more front and center on the startlingly segmented trading tape.

Prior to that gap, implied volatility had, for most of the Asian mid-week session, comparatively inched along, in a mulish drag higher. Volatility’s initial resistance to rally stemmed in large part from thick, fixed price top of book offers in 1-2month ETH quarter-delta risk, which saw May strikes given below 50% and same-delta June upside hammered down to nearly the same level. This saw ETH skews cling to a preference for puts, with the 2 month 25 delta spread still marked at 2 vols to the downside, in a marked contrast to the BTC surface. The aforementioned relatively heavy-handed supply of front end vega was, however, ultimately digested, at least in part, as spot rocketed and a land grab for both Friday, 28th April and 5th May gamma commenced. By the time BTC and ETH crested 29000 and 1900 respectively (for the first trip up), IVs found firmer footing some 3-4 points higher than the dead-ball lows of the night prior as rational buyers of shorter-dated calls and call spreads emerged from the woodwork and munched their way through a still-lazy if not entirely catatonic supply of gamma, where an inchoate premium for FOMC meeting began to expand.

Yet, while ‘apathy’ has surely been one of the watchwords of the options trade to close out this month, ‘nausea’ is perhaps the latest addition to the lexicon. Not long after the Wednesday morning moonshot to 30,000, the big figure proved to possess merely fissional finality as an inundation of selling tripped short gamma stops and sent players scrambling to cover downside risk in a frenzied reversal that utterly eviscerated late-comer longs in a merciless wipe right back to 27,000. Vol traders reeled and short dated IVs spiraled towards the 70% threshold in deference to the zero-g trading cadence.

Crypto proved that it takes no prisoners and suffers no fools with one last queasy, squeezy push some 8% higher off the lows to close out the Wednesday session, with round numbers 29,000 and 1900 offering some heuristic solace to a market searching haplessly for an anti-emetic. Thusly, it is not entirely irrational to ask, after over 30% of absolute range traversed inside of 24 hours, what implied volatility is doing at these levels. The Deribit DVol index sits at a staid 54.25 for BTC and 56 for ETH, with helminthic term structures that suggest little to no preference for event-driven gamma over midcurve vega at a time when event risk and exogenous shocks of the kind seen over the past week have not been in short supply.

Written By

Gordan Grant

Managing Director, Trading and Sales


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