March 30, 2023

Desk Commentary - Drawn and Quartered

As the quarter draws to a close, the crypto complex has managed to shake off another dousing of regulatory actions with ETH showing a modicum of leadership in Tuesday’s trading tape and BTC continuing its buoyant habits the following day.

What appeared to be a passive bid for BTC underneath the market (such that dips below 27000 were well absorbed on multiple occasions) catalyzed a squeeze right back to pre-Binance-headline highs, and in that rebound, implied volatility performance, while initially heterogeneous both between and within pairs, smartly tracked spot with April 40 delta calls paid up to 64.5% to close out the 29 th March New York trading day. Call demand featured throughout the Wednesday session, in marked contrast to the day prior when a barrage of April at-the-money strikes hit screens and block-trade RFQs with a heavy handed execution that pushed front month expiries briefly into the upper 50s before finding a firmer footing as BTC rallied back.  Throughout the week, May 40 delta upside has also resolutely held near the 63% level as sizable OI lurks north of 30k, and axed buyers of 50-delta/30-delta call spreads for the two-month tenor demonstrated just how keen some players are to get local strike risk back on the book even at the upper quartile of this year’s IV ranges.

In ETH, there’s been a renewed appetite for strikes just beyond last year’s pre-merge peak with steady block-buying of 2000, 2100 and 2200 April calls totaling over 50,000 units just within the last 48 hours, driving BTC-ETH IV spreads briefly back from parity, while sizable RFQs emerged on Tuesday for ATM risk in the ETH May tenor, something of an anomaly considering just how offered the 1800 point has been across nearly the entire curve.

All-in-all, on the cusp of potentially pivotal GDP, inflation, and weekly jobless claims, there is scope for a data-dependent cadence to assert itself in the final days of Q1 and into Q2 2023 which, compared to the end of 2022, has seen a sea change of upward pressure on IVs, persistently positive spot:vol correlation, and more elevated levels of volatility variance than were the case 3 months prior. And in that same vein, the tone of the entire complex has shifted as spot clings to cyclical highs. Compared to Q4 2022 when industry-wide shocks sent prices time and again toward the lows of the year, what we have seen of late is more akin to resilience and antifragility. In the face of continued banking-sector clampdowns on crypto’s fiat rails, a series of high-risk headlines about regulatory action against major exchanges (a Wells notice for Coinbase, a staking-related fine for Kraken, and a sweeping set of charges leveled at Binance), and eye-opening stablecoin instability, crypto majors in particular have rekindled the market’s imagination in geometric upside potential for the asset class.

The recent surge in options volumes and open interest has been not only a testament to that conviction, however, but also indicative of a market that may be satisfying its inveterate predilection for leverage both via futures and, increasingly, via non-linear derivatives. That tendency may be a function of numerous factors, including various constraints on venue access, unfavorable risk assessments, jurisdictional limitations, roadblocked fiat-access points, and fundamentally altered collateral considerations. Regardless of the cause though, delta-1 liquidity appears to have begun to falter just as the crypto market begins to express a fresh impetus to scale up its risk-taking, and therefore, options prospectively have a materially more significant role to play in that context.  As such, for the quarter to come, the stage is set for another potential leg higher in the secular broadening engagement with non- linear products by a diverse array of participants.

Written By

Gordan Grant

Managing Director, Trading and Sales


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