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Last week continued with BTC ranging between $42,000 and $43,000 in this sort of low-volatility manner following a previous drop. The market paused briefly from dropping further until finally dropping all the way to $40,500 on Friday. Although there was a momentary bounce back to the high $41,000s, it was short-lived as another market drop occurred at 3 AM on Monday. By the end of the day, BTC broke $40,000 and is currently hovering around the mid $39,000 price level (ETH at approximately $2,200). Interestingly, the crypto market continues to display little to no correlation with equities, as the S&P maintains its bullish trajectory, surpassing $4,840 and breaking its all-time highs.
In the options markets, positive spot-vol correlation continues to be evident, with drops in spot price causing a decline in at-the-money (ATM) implied vols across all expiries. Even front-end vols (super short expiry such as Jan26) decreased from 50 to approximately 46. For Mar29, Jun28, and Sep27 expiries, vols shifted from 51, 55.7, and 57.8, to 46.65, 51.98, and 55.025, respectively. ETH ATM vols are at similar levels, differing from Bitcoin by only 1-2 points. It seems that volatility sellers seized the opportunity to sell calls and call-based spreads at these price levels as selling upside is attractive with current market dynamics.
Term structure of skew remains positive, indicating that volatility skew increases as one looks at further expiries. Skew is measured as the difference in implied volatility between equidistant call and put options from the at-the-money (ATM) point. For instance, the 25-delta skew is the difference between the implied volatility of the call at the strike corresponding to 0.25 delta and the implied volatility of the put at the strike corresponding to -0.25 delta. A positive skew suggests that the options market prices upside volatility higher than downside volatility. Currently, skew starts as negative for shorter-term expiries and turns heavily positive for longer-term expiries, implying a market preference for downside in the near term and upside for the long term.
If price action continues to be bearish or indecisive over the next few weeks it is likely that market participants will continue selling short-mid term upside vol, further depressing vol levels and skew. Further dated skew should remain positive unless a catastrophic market downturn occurs, since selling further dated upside in crypto is extremely risky. That being said, there are also likely many market participants taking advantage of this by selling further-dated calls to fund the purchase of either shorter-dated puts or calls.
Combo spread volumes pick up this week in both coins as market volatility ensues. Vertical spreads (call/put spreads) naturally coming in first as skew is evident for most expiries. Although from Deribit combo spread volume the majority direction of the trades isn't clear, the call spreads are likely being sold while the put spreads are being bought.
BTC Combo Spread Volumes:
ETH Combo Spread Volumes:
***Data and insights as of January 24th, 2024 12:00:00 UTC
***Data and insights as of January 24th, 2024 12:00:00 UTC
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