January 26, 2023

Desk Commentary - Re. Bound.

In this week’s Desk Commentary, Genesis is commenting on the recent movements in the market.

  • After bitcoin’s teleportation to 23,000 last Friday, which dragged ETH in sympathy up through 1650, spot markets had traded for several days in a relatively tight range around those levels before they finally came unglued in late Tuesday New York / early Wednesday Asian trading hours.
  • In thinner Lunar New Year conditions, token majors broke to the downside with ETH, which has materially lagged BTC’s dominating performance in 2023, leading the way lower through 1600, and eventually probing resistance ahead of 1500 support.
  • Front end implied volatility, particularly the Friday 27th Jan date (pre FOMC), had already cratered throughout the NY day session, testing 50% and 60% respectively for BTC and ETH.
  • The 4% drop in underlying coin prices did little to bolster demand for IVs, with front month BTC resetting to the 57% level, some 3 vols lower than the same time day-prior and matching the level of 10-day realized.
  • While that’s not entirely surprising given the entrenched, robustly positive spot:volatility correlation that’s been in evidence since BTC took off from 17k on 10th January, gamma at such valuations did not appear to demand an excessive premium over recent historics.
  • Yet supply of the entire February bitcoin straddle strip continued unabated throughout Wednesday, with 1000s of units combined of 3rd, 10th and 24th Feb. 23k strikes inundating RFQs as bids were given with ostensibly limited discretion.
  • As BTC spot bounced back from lows near 22,300, relentless selling of front month IV slowly receded, and true to form, the tide turned with keen demand for 24th Feb 28k calls just above the 60% IV mark; by way of contrast, 3rd Feb 28k calls were paid north of 85% IV just a few days ago. Friday 27th Janvols, which had been given as low as ~45% mid-session, sharply retraced by 6pm EST towards the 70% level as if in a vacuum.
  • Thus, strongly positive local spot:vol correlation regime appears to remain in force, with a nominal heuristic range of 50-70% setting the corridor for traded value in front-end bitcoin options.
  • Net net, as spot has surged back through 23kin the New York afternoon, traversing a $2000 cumulative range over mere hours in a continuation of the searing runup in crypto prices since 10th Jan, there have arguably been worse times for owning optionality. Absent a middle-of-the-road outcome for the FOMC and bang-in-line prints for February’s major data releases, which could see the onset of another bout of derivatives-market torpor and a subsidence of the sudden rebound in demand for vol, there may be further upside to IVs in the near term if BTC and ETH spot continue to hit multimonth highs.

Written By

Gordan Grant

Managing Director, Trading and Sales


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