February 23, 2023

Desk Commentary - Over. Under.

Until Wednesday 22nd Feb, the final full trading week of February had evinced mixed elements of dogged persistence on the part of directionally biased players as well as, almost surprisingly, a waning propensity to sell optionality on any stagnation in spot.

Front end implied vols did peak over the weekend session with both bitcoin and ether thrown once more into the breach at 25k and 1700, but thereafter, the relatively low-drama +5% pullback saw little of the inveterate, reflexive markdown in IVs that’s been so typical with spot retracements throughout this year’s strong uptrend. And while it was predictable to expect vulnerability of shorter dated vols to further downward pressure from their Wednesday AM levels of 55-57% in bitcoin, coming into the FOMC minutes, the midcurve segment of the term structure was as firm as it’s been in quite some time, thanks to Tuesday’s aggressive taker interests in size at the 10 delta point, where > $60,000 of vega was purchased in a rapid flurry of RFQs to round out yesterday’s NY session.

But as we often observed throughout Q4 2022 and thus far in 2023, countervailing flows arrived – merely a day later – in rapid succession: eager sellers of June strangles and straddles hit bids well below mark with side-by-side RFQs bombarding the tape in an gratuitous spray shot of vega not seen since the third quarter’s notorious drive-by of same-tenor 19,000 straddles (when implied vols were on a 7 handle!). Competitive appetite for premium was, however, noteworthy, as bids came back relatively firm with the better part of $100,000 worth of vega shed inside an hour. It’s worthwhile to remember that in Q3 2022 at the time of the trade, the June 19k straddle breakevens were roughly ~10,000 and 28,000, which is barely 10% above the recent highs with which bitcoin has lately flirted. Hence, the secular downtrend in vol notwithstanding, it is worthwhile to observe that the breakevens on today’s trades are, essentially, just under 20,000 and just over 30,000, which necessitates an inquiry of just how lucky should straddle sellers feel receiving less than ~25% premium for an asset which has once again proven capable of moving as much in mere days and for which recent trading activity has demonstrated a material marginal propensity to bid IVs on any detectable signs of a breakout.

In that vein, the palpable proclivity to reach for vol as spot starts to surge was made manifest once again into late Wednesday New York / early Thursday Asia; bitcoin spot broke back through 24,500 in yet another demonstration of the resilience of the tape, and with it came a new deluge of demand for vega: takers RFQ’d clips of 300, 500 and 1000x units of 30-40 delta topside in the December maturity, by far the least liquid and most infrequently trafficked on the term structure. Nearly $100,000 of vega was scooped up just above the 60% IV level, rapidly realigning what had been an outstanding value point on the curve.

ETH, by contrast, continues to be a sideshow even as the eve of Shanghai approaches, and with dealer books ostensibly saddled with large amounts of near-to-the money June upside from prior overwriter activity, relative value comparisons vs same-date BTC vols are unavoidable. In that vein, Tuesday’s appetite from quantitatively oriented players to leg into volgamma via sizable convex 1×3 call spreads in the June tenor is indicative of those looking for better odds of a geometric move than is priced into the ETH surface, which is, at the current levels of 10 delta butterflies, effectively more affordable in ether than bitcoin at the present moment. That could, however, be more a function of macro narratives which have postured bitcoin’s deflationary self-sovereignty ahead of continued innovation on the Ethereum network, and less a consequence of coldly calculated distributional analytics.

In either case, the imagination of participants to contemplate a further extension of this year’s robust rally offset by the hunger for potentially handsome static return generated from option sales is perhaps the most salient dialectic of the trading tape of late, and that suggest such dynamics could remain a key driver of the crypto vol market’s nascent reconditioning to take a more balanced approach to appraising the future prospects for IVs.

Written By

Gordan Grant

Managing Director, Trading and Sales


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