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This week we see implied volatility lift across cryptocurrency markets. BTC volatility smiles shifted up about 2 vol across all tenures. This movement was only seen for closer dated tenures in Ethereum, as ETH further dated expiry remained relatively stable. Term structure also remained relatively stable since last week, as there were no disproportionately large movements in any specific expiry. Most of the flows we saw this week were centered around put based long volatility. It seems that before the upcoming large ETF decisions and macro events in the coming months, traders want to take advantage of the low volatility regime to find cheap hedges and spreads.
This week we look at the concept of vertical spreads. A vertical spread refers to any multi legged options portfolio where the constituent pieces all have the same tenure. Common examples would be call spreads (long call short call) and put spreads (long put short put). Depending on which strike option is long and whether it is call or put based, the payout can either be bullish or bearish. For example, long BTC call of 28K strike vs short BTC call of 30K strike has the same payout as a regular long call until 30K, at which point the payout graph flattens out (since the short call will cancel all PnL above 30K). This would be called either a call spread or a bull call spread. Bull spreads can also be constructed with puts by buying a lower strike put and selling a higher strike put. Bear Spreads have the opposite facing payout charts; they go up when the underlying goes down, similar to puts.
Vertical spreads can be constructed in numerous ways and are versatile positions which can be tactically used in various market scenarios. Put spreads (long put higher strike, short put lower strike), have been quite prevalent in recent weeks and it is easy to see why. Traders who believe the market is short term bearish but don't want to break the bank to buy downside vol can take this position. Buying the higher strike put gives the downside exposure while the premium generated by selling the additional short put funds this purchase. By sacrificing downside gain below the lower strike, they can express almost the same market view for much cheaper. Another example of vertical spread use is a short call spread. Rather than selling naked calls and having infinite risk, one can sell a call and cap the risk by buying a higher strike call.
This week we saw a healthy mix of flows in BTC and heightened block trade volume in ETH. ETH also showed an unusually large concentration in call based volume on Deribit with 39.8% of the volume being calls bought and 35.4% calls sold. Digging deeper into BTC Deribit and Paradigm block trade data we see the biggest volumes in Put Spreads, Strangles / Straddles, and Risk Reversals (24.2%, 18.1%, 14%). The top 3 ETH combination spreads traded on paradigm were Call Spreads, Put Spreads, and Put Calendar Spreads (25.3%, 24.8%, and 14.8%). Also seen was 2000 contracts sold of put butterflies on Paradigm.
BTC Combo Spread Volumes:
ETH Combo Spread Volumes:
***Data and insights as of September 11th, 2023 12:00:00 UTC
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