March 23, 2023

Desk Commentary - Rerating

The pre- and post-FOMC cadence in crypto vol markets largely adhered to well established patterns: front-end implied volatility wafted higher in a vacuum through Wednesday morning even as spot stagnated with an uneasy equilibrium at 28,000 and 1,800 for BTC and ETH, respectively.

In that context, select fixed strike bitcoin IVs began to ‘flip’ those of ETH, with Friday 24 th March at-the- money mids in BTC nudging through 90% whilst equivalent options in ETH were offered there as mid-day approached in the New York session. Thereafter, following the Fed’s announcement of a 25 basis point hike, vols deflated in rapid fashion with a sawtooth set of swings in spot that tripped stops below both 28000 and 27000, as choppy price action suggested a material amount of short gamma spiking with short-dated IVs slipping by as much as 20 points from levels seen pre-release.

That’s not entirely surprising given that the trading tape over the past week has continued to be dominated by buyers of gamma (and to a lesser extent vega) across a variety of RFQs, and as such the failure to break higher towards 30k left a landscape primed for some measure of disappointment. That reckoning did not entirely limit itself, however, to bitcoin, for which larger- sized block trades have recently outnumbered ETH inquiries by as much as 5 to 1 (or more). The ETH surface’s sudden, sharp realignment in skew from 6- 10 vols over for puts as of March 10-14 th to 10 vols over for calls as of 21 st March evinces a vol market leaning slightly over its skis, and the 5+ point dip in fixed strike IVs at the 2k strike for April 28 th over the last 48 hours was a noteworthy if rational correction. That’s both because ether’s implied volatility has only begrudgingly rallied in sympathy with bitcoin IVs on higher levels of spot and because the market has been unable to slide past chunky strike inventory on dealer books at the 1700 and 1800 levels, a legacy of aggressive call- selling flows seen over the last quarter.

For bitcoin, which has witnessed a ~40% rally in ~14 calendar days, while the hours after the FOMC saw some abatement of the recent levitation in call wings, demand resurfaced with impressive vigor. Consider that, prior to the Fed announcement, 1 month 25 delta bitcoin calls sat at ~71%, some six vols above same-date at-the-money contracts and priced roughly 3% in terms of premium. After the rate hike, directionally oriented players lifted size March 31 st 20 and 30 delta calls at ~70% and 68% respectively, apparently expressing the view that the modest pullback in spot and vol (which remain inextricably bound in the current bullish regime) presents a potential buying opportunity and portending further excitement about another run to the 30,000 pin for the quarterly expiry, where nearly 9,000 units of open interest sit.

It remains to be seen whether longer-dated bitcoin upside will garner similar renewed interest. It’s worth mentioning that six-month 10 delta call wings, having reached a 78% bid prior to today’s pivotal interest rate decision, remain less than 3 vols below comparable ether options, even as IVs for both slid lower by as many points in just a few hours this afternoon. In that vein, the proximity of BTC and ETH call wing pricing represents an eye-opening display of the sharp cyclical compression of the IV-difference between these two crypto majors. In that context, we are a world away from historical spreads, and such a parity between bitcoin and ether vols feels particularly anomalous when compared to periods when 3-6 month low-delta calls in ETH have pushed well into the mid- triple digits, dozens of points higher than same-delta bitcoin vols.

Yet plays for a reversion to the mean have accordingly proven hazardous, and the overall IV- convergence seems, therefore, to reflect another facet of the broadening embrace of bitcoin’s renewed rise to prominence as a purported alternative anchor within the globally fraught traditional financial system. Time will tell whether bitcoin miners and others elect to harvest static returns by returning to sell calls in size or whether speculative appetite for upside exposure to ETH boosts IVs back toward historical norms. As concerns the former, if anything, the past practices of such participants may suggest that the marginal supply of calls does not perforce respond with immediacy to sharp price appreciations and, in some cases, may in fact exhibit an unexpected degree of inelasticity. As concerns the latter, idiosyncratic impetus from the upcoming Shanghai event may yet hold sway.

Written By

Gordan Grant

Managing Director, Trading and Sales


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