February 9, 2023

Desk Commentary - Pins & Needles

Crypto majors faced yet another ephemeral breakout at the start of the Wednesday session in APAC as ether in particular failed to hit escape velocity (again).

Even though major catalysts such as U.S. CPI data await next week, this Friday’s 10th Feb 1700 strike has garnered attention for recent growth in open interest, with over 10,000 units trading in a brief flurry earlier in the week.

With ETH appearing to show increased resilience in the 1600s, the trading tape has turned toward the prospect for further gains, and volatility dynamics as spot repeatedly threatens to breach the 1700 threshold have been telling.

While dealer desks on Monday had appeared eager to supply the short-dated upside judging by the relatively low-edge prints, there was a palpable discomfiture in evidence on screens when that same 1700 strike neared at-the-money, with offers being backed up and bid/ask spreads widening out, briefly, to ~70%/75%. The gradual retracement away from the large pin saw Friday vols slide lower by nearly ten points, however, and it remains to be seen whether the ostensible wall of selling above can ultimately be overrun by a gamma-driven squeeze.

Bitcoin vols by contrast have, for a change, gone quiet; 1,500 units of Mar/Jun diagonal spreads traded tight in the Tuesday New York afternoon taking advantage of a mild term structure steepness while some appetite to grab cheaper wings showed up in the form of Jun 30k/40k 1×2 call spread sales. 23,000 retains something of a magnetic force, and the market has found an unexpected if perhaps fleeting equilibrium just off the highs for the year. In that vein, as the current consolidation continues, the front of the curve has begun to cave in, with 10th Feb at-the-money strikes flirting with the 40% level and both 24th Feb and 31st March 50-deltas offered below 50%, begging for the return of higher historical vols to stabilize IVs and to stave off a gamma driven death spiral for both realized and implied. The rhythmic fluctuations in spot over the first three days of the trading week have been testament to such an eventuality, with every dip towards 22,500 met with ostensibly staunch demand and rallies toward 23,500 met with commensurate supply. The 10/17 February bitcoin IV-spread has blown out from nearly flat on Monday to 7 vols at mids as of Wednesday afternoon, with strike risk at the figure perforce entailing intraday taffy-pull price action.

That relative inertia notwithstanding, value-oriented buyers did emerge from the woodwork, with 1000 units of a March ~30 delta/~15 delta bitcoin call spread paid just 10 bps off mids on Wednesday morning with a 5 vol point spread between strikes in deference to persistent pricing of spot:vol correlative dynamics, while incipient demand for both 24th Feb and 31st March atm strikes emerged at the 47% and 50% levels respectively. Longer dated overwrites offered a counterpoint of supply as December ~30 delta calls traded on a 56 handle, more or less in line with long-term realized volatility in a demonstration of still-compressing volatility risk premia.

Tight ranges may therefore persist until the arrival of fresh impetus to exit what could be a considered a healthy if tight trading range. Ongoing hawkish discourse from Fed officials has not stymied stability at elevated (compared to 31st Dec levels) coin prices, and as comfort grows at the newly established supply/demand nexus of 23000 BTC and 1650 ETH, it may be again time to consider plays for optionality on optionality in the days ahead if vol remains under pressure.

Written By

Gordan Grant

Managing Director, Trading and Sales


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