March 16, 2023
If February was a definitive month for the reprisal of broad-based participation in cryptocurrency derivatives markets, March (and the second trading week of the month, in particular) has felt increasingly like a symphonic crescendo of that trend.
Volumes coming out of a chaotic weekend which saw the collapse of multiple banks, a de- and re-pegging of USDC, and an ongoing flight to quality in both tradfi and crypto were nothing short of spectacular as the 24-hour total of bitcoin options traded on deribit exceeded $2.4bn, its highest level in nearly two years. Implied volatility took its own trip back to levels not seen since the collapse of FTX, with 17th March strikes flirting with 100% on multiple occasions, including size prints of 500x two-day 24500 puts post Wednesday’s PPI that saw the term structure inverting fiercely with 2w-2month bitcoin vol spreads blowing out into the double digits.
As has been an inveterate tendency this year, bitcoin higher prices have meant surging volumes, greater gyrations in spot and higher levels of variance for implied volatility itself, with IVs on benchmark 31st March ATM strikes swinging within a ten-point daily range and the trading tape lurching from one print to the next across bid / ask spreads that have expanded as much as 5 vols or more depending on the size and tenor.
Along with sudden spikes in realized volatility, that phenomenon is due in part to newer, more aggressive players in options markets who have ostensibly upped the ante in terms of option block sizes, with clips of 500 bitcoin units (predominately 1w-3 month calls) becoming de-rigeur, as cumulative RFQs quickly totaled well into the thousands of coins and as traders entered and exited chunky positions within hours. Tactical punts in this vein have seen quarter delta strikes slide almost immediately in-the-money, catalyzing opportunistic sales, strike rolls and fresh buys to open in two-, six- and ten-week expiries at the ten-delta call wing, where IV premiums to ATMs have expanded materially in sympathy with persistently positive realized spot:vol correlation.
By contrast, ether once more has been largely a secondary act, and thus implied volatility there has been relatively subdued with periodic large taker flows encompassing outright call take-profits sales and strike roll-ups, where dealer inventory of mid curve calls has found some semblance of speculative demand.
Overall, though, it is the narrative ascendency of bitcoin as an apex macro flagbearer in the context of systemic traditional financial sector vulnerabilities that’s taken hold and begun to dominate the trading tape. After a severe dip during the 3 rd -10 th March period that saw 20,000 retested before the latest violent rebound, the thesis that bitcoin may provide a viable diversification alternative to untenably compromised fiat-denominated sovereign rates and banking credit product has found renewed support from sympathetic adherents in recent days. In that context, the breadth and depth of options liquidity has continued to impress, and the capacity of crypto derivatives markets to facilitate risk-taking in heretofore exceptional size has ably contributed to a commensurate rise in volatility and a concomitant surge in options activity from both crypto native and tradfi names alike. Any material additional year-to-date outperformance of bitcoin (compared to tradfi assets) could prospectively serve to put it on the map for a widening range of participants. If such an eventuality were to implicate a further snowballing of speculative demand for upside exposure, options open interest and volumes may be poised to exceed all-time highs in the weeks and months ahead.
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