April 20, 2023

Desk Commentary - Nervous Breakdown

The remarkable tranquility which the crypto market had exhibited since the start of the second quarter saw its first test in weeks as BTC and ETH faltered and broke below key technical levels in the Wednesday session.

As spot markets had stabilized at cyclical highs after impressive rallies across the board, gamma had been sold down in a bear steepening regime for the term structure of volatility, with Friday 21st April bitcoin straddles given below 50% in the Tuesday afternoon, while ETH had seen continued if sporadic demand for plays on fresh upside potential. In Vega land, a rapid series of lifts in September 10 delta bitcoin calls punctuated the end of the day-prior New York session, setting an ambitiously bullish tone with bitcoin wafting above 30500 once more on thin volumes.

Those aspirations were dashed as hump day hit with majors plummeting ~4-5% in short order with an abrupt air-pocket in price action. Yet vols were muted if not entirely indifferent: by the New York morning, Friday gamma caught a modest bid and firmed up above 50% while longer-dated vol was also curiously marked higher in a defiance of now-inveterate positive spot volatility correlations. Skews notched marginally lower away from calls and toward puts, though also with little drama.

Outperforming tokens like AVAX, RNDR and other alts nose dived by as much as 7-10%, in a reminder that high-beta can still very much manifest to the downside even in a market where it's only been about BTC and to a lesser extent ETH on the way up. Not surprisingly the Genesis derivatives desk has seen a growing two-way interest in alt-coin volatility with numerous RFQs and fresh prints over the past few weeks as these markets have heated up in sympathy with the majors.

By the New York close, BTC made a feeble run below 29,000, tripping stops as it did so but finding a surprisingly firm footing as spot bounced $300 in pert fashion, while ETH nattily held well above 1950 before a quick bounce toward levels more comfortably in the bottom of post-breakout trading range since Shapella. The Wednesday afternoon session saw gamma gradually catch a better bid, though size RFQs to scoop 21st April risk for 28th April failed to trade, whereas chunky May/June diagonal spreads hit the tape in rapid succession with a tactical take on term structure optimization that could pan out if spot steadies and the curve steepens. Fixed strike sub-15 delta wings remained flat to higher out the curve in both majors, likely as a function of legacy dealer bids from the $25k+ September bitcoin vega that printed on Tuesday evening as well as a deferential nod to the notion that optionality on vol has a price some participants are willing to pay.

As markets take a momentary pause, it would not be unreasonable to observe further balanced action between hedgers, overwriters and directional players looking to express fresh directional views in a market that remains squarely in the public eye, as the grand theatric spectacle of yesterday's congressional testimony has witnessed. Technical levels in this year’s fierce uptrend have once more begun to play an increasingly key psychological role in the minds of the trading community that’s been lacking fresh impetus to press towards new cycle highs, and should those fail to hold, better buyers of short-dated optionality could emerge on the break. The picture is murkier for vega where at-the-money risk has been marked down nearly to the year’s lows for the June tenor and in which even convexity has taken a proper shellacking in recent days.

Written By

Gordan Grant

Managing Director, Trading and Sales


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