March 9, 2023

Desk Commentary - Evrporation

The gamma sink at the 22k pin has appeared to persist through midweek as Chairman Powell’s first day of testimony came and went with little fanfare. While macro pundits have contended that there is a new mantra of higher for longer, and the concomitant threat of policy rates hitting 6% dawns on markets, crypto traded mostly in its own lane, paying scant attention even to the SEC hearings on Grayscale’s application for a spot bitcoin ETF, after which Bloomberg analysts ascribed an increased chance of a favorable ruling to 70%.

While choppy, Tuesday largely centered on multiple runs towards (and, briefly at times, below 22,000) with erratic bounces punctuating a trading tape that saw incremental demand for overnight, two-day and Friday 10th March near to the money strikes from both directional and volatility-oriented players.

Moving into the Asia morning on Wednesday, midcurve vols in BTC and especially ETH sagged below fair-value metrics with respect to the rest of the term structure, principally catalyzed by chunky nominal overwrite flow that saw nearly 30,000 units of ~30 delta ETH calls push IVs down into the mid 50s. The most active options contracts for bitcoin within the 24-hour window around Powell’s time on the hill were, not surprisingly, 8th, 9th and 10th March expiries, with nary a major vega trade in sight, save for a scant few tactical September/December calendars with dealer book-jostling fingerprints on them.

Thereafter, whilst bitcoin flirted with thinning support at the 22k threshold, the gamma-soaked order board mostly held things in place absent another modest lurch toward 21500, ostensibly supported by option-driven bids and value buyers. Yet strike open interest looming 5-10% away (particularly to the downside) for the major quarter-end expiry began to beckon, and by Wednesday evening in New York, the tape began to pick up velocity and volume in an unusual confluence of flows that may set the tone for the weeks ahead. Directionally oriented players and vol-driven names found extraordinary offered-side liquidity, lifting nearly 2000 units of 31 March 15 delta downside less than half an IV-point from mids, while an inundation of TOB offers hit the ETH order books in both March and April, initially pushing implied vols below 50% for front-month quarter delta calls, levels not previously seen. Whether owing to spreading interest or relative value demand, bids initially came back firm and over 40,000 units of those ETH calls changed hands in a flurry, while in the back end of the curve, a block of 10,000x Dec 10-delta calls were offered up essentially at mids in an immodestly capitulative display of vol-selling desperation. It’s a noteworthy sale given that the change in vega on such a low-delta long-dated strike for even a spread’s worth of vol would negate a material portion of the vega intended to be sold, somewhat circularly, while the overall premium received appears, nominally, unappetizing even for an overwriter.

As IVs settle in for the back half of the week ahead of nonfarm payrolls, vols have found something of a footing with markets eying key support levels lower in spot where options could attain more than the present paucity of fast-evaporating volatility risk premium.

Written By

Gordan Grant

Managing Director, Trading and Sales


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