The highlight of last week was the approval of the Bitcoin spot ETF on Wednesday. However, the price action was not particularly bullish after the decision; some would even say it was bearish. BTC experienced a wick up to $48,000 and subsequently dropped to $42,000, while ETH also surged to $2,700 but followed suit on Friday by dropping down to $2,500. Despite the strong correlation between the two assets, it is interesting to note that while BTC dropped to essentially the same price levels as before its run-up in anticipation of the ETF day, ETH only retraced about 50% of the way back down, previously hovering at $2,200. This may suggest that the market has shifted its attention towards ETH, and traders should consider a more bullish outlook for ETH/BTC prices. This all points to the fact that ETF approval was already priced into BTC, and what led to the drop was the market’s underwhelming momentum on ETF day.
Last week witnessed the most significant surge in implied volatility levels in recent weeks, with front-end (near-dated) vols surpassing 100 at the beginning of the week, while mid-to-late term vols ranged from 60 to 70. The notably heightened front-end volatilities can be attributed to market makers pricing in substantial market volatility in the days leading up to ETF day, resulting in expensive optionality for market participants (understandably so). As the market has recalibrated, front-end vols now sit lower than mid-to-late term vols, creating a rising term structure in the implied volatility surface. Specifically, Jan26th vols are at approximately 50, while Mar29, Jun28, and Sep27 vols are at 51, 55.7, and 57.8, respectively. ETH vols for the same expiries are at 50.6, 57.6, 62.5, and 63.7. This shift in implied volatility structure suggests a changing market sentiment and will certainly influence the pricing and attractiveness of certain option positions for various expiries / strikes.
The current structure of the volatility surface is an interesting one and presents numerous opportunities. The rising term structure will no doubt attract vol sellers in the further expiries and likely create lots of diagonal / horizontal spread volume. The persistence of call side skew in latter months also means that longer dated upside expectations have not waned, thus many traders will likely still be taking call spreads. Short dated vol is now cheaper which means that downside hedges like put spreads are currently cheap. As always, please feel free to consult our derivatives experts with any questions regarding your options’ strategy.
Combo spread volumes this past week overwhelmingly tilt towards call spreads, as BTC shows nearly 36% of volume concentrated in call spreads. Lots of vol sellers are likely coming in at these levels likely due to heightened vol levels not catching up with the market’s underperformance on ETF day.
BTC Combo Spread Volumes:
ETH Combo Spread Volumes:
***Data and insights as of January 17th, 2024 12:00:00 UTC
***Data and insights as of January 17th, 2024 12:00:00 UTC
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