November 3, 2022

Desk Commentary - Week 44, 2022

Vol sellers were given a modicum of fright coming into the 31st October monthly expiry, though that brief blip faded into further apathy as crypto majors prepared for the all-important 2Nov FOMC.

Weekend fireworks that saw bitcoin retest the 21000 level were promptly extinguished as delta supply from a surfeit of upside gamma (amongst other putative factors) convincingly capped prices. ETH by contrast, rallied materially further; after probing sub-1500 when tech earnings, at least in part, tanked markets to close out the week, spot roared back as directional players and underhedged gamma shorts scrambled to strap on length into the push towards 1700, before gravitating towards a healthy 1600 pin.

In deference to the significant event risk over the coming days (today’s FOMC, NFP, Congressional Elections, and CPI), front-end vols had bumped towards cycle highs before 2pm ET with Friday BTC and ETH atm strikes bid at 64% and 90%, respectively. The BTC term structure had inverted accordingly, with 11 Nov 6 vols under 4 Nov; for ETH, where gamma hds begun to once again perform somewhat respectably, the inversion was more pronounced at ~8v. It was barely weeks ago that these atm figures were 25-30 points lower with steep, positive term structure, which represented quite a change and which, all else equal, could serve as a prospective guide for how volatility surfaces may align in the coming days. Given the primacy of the FOMC rate decision for markets, the relatively good offered-side liquidity in front end options pre decision (and the onslaught of supply ex post) is a reminder that, on balance, lingering fears of yet another vol implosion have yet to be put to rest by any sort of true blow out move in spot and that, absence fresh catalysts, flat or indeed inverted term structure may not persist.

Perhaps equally significant, the persistence of positive spot:vol correlation (insofar as gamma is concerned) has been priced into the ether options market with 25 delta skew bid to the call through 18 November in ETH. BTC skews remain flattish though slightly tilted to the put, quite naturally, owing to continued (if less enthusiastic) supply of calls from overwriters at present levels of spot.

Longer dated skews in both names remain bid for puts, while flies have continued to nudge higher as the market acknowledges that severe movements away from present levels of spot may be associated with higher degrees of both realized and implied vol, particularly to the right hand tail of the distribution of prices where in both BTC and especially ETH, chunky OIs lurk for both the November (>300k units 1600-2000 strikes) and December (>250k units 1600-2000 strikes).

With IVs deflating rapidly post FOMC and thus remaining closer to the lower-middle of their longer-term ranges, warehousing vol is not so immediately obvious a choice as it was at the lows of early Q4; yet there remains a dearth of supply in vega buckets and an appetite amongst relative value players to scoop longer-dated optionality and convexity.

Written By

Gordan Grant

Managing Director, Trading and Sales


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