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The bullish momentum that kicked off last Monday continued to dominate the market throughout the week. The initial wick to $30,000 early in the week now appears to have been a telling precursor to Bitcoin's subsequent upward surge. Starting Thursday, Bitcoin began a strong bullish rally, breaking $29K on Thursday, then $30K on Friday. Similar price action continued into the weekend with $31,000 almost breaking last night. Ethereum followed suit with its own notable rally, breaking $1,700 just a few hours ago. However, the story in traditional markets unfolded quite differently. Last week, S&P had a significantly bearish week, with ES (S&P future) experiencing a nearly 4% decline with ES opening the week at $4,400 and closing at $4,245. Overnight, it incurred an additional 10-point drop, suggesting that the week ahead in the TradFi may bring more challenges and market downturns.
Bitcoin implied vols also surged in response to price action. Closer dated vols saw a massive 10 point jump from 30-35 to 40-45. Interestingly the front end of the curve still retained the same U-like shape, namely, it starts at 46, dips down to 41.4 for Oct27, and increases back up to 44.7 for Nov24 expiry. December vol also jumped about 10 points from 39 to 50 vol. Further dated expiries like March, June, and September 2024 show a gradually increasing term structure from 53 - 54.5. ETH implied volatilities show a very similar shape, just shifted lower 1-3 vol depending on the expiry. All in all it is not surprising to see this sort of response in the vol surfaces of BTC and ETH. For one thing, positive spot-vol correlation seems to be the norm in this market. For another, perceived future volatility must be started by current realized volatility. Nobody wants to pay more money to bet on the future of a dead market, so from that perspective it makes sense that realized vol is needed to stir up implieds. As with everything in crypto, overreaction is the norm so a 10+ point move in vol is not unexpected.
There are a few other notable features to mention in the crypto options market structure after this move. 25-Delta skew is now very positive and shows an increasing term structure. Specifically, December, March, June, and September skews are 5.77, 6.44, 8.15, and 9.47 respectively. This can be visually seen by looking at the fixed expiry smiles below and comparing the right (call) side to the left (put) side. Average convexity also decreased which can be seen by the decreased butterfly vol index.
In this week's "Honing In" section, let's delve into an essential concept in the options market - Theta, often referred to as the "time decay" factor. Theta plays a pivotal role in understanding the dynamics of options pricing, making it a vital consideration for traders and investors.
Theta measures the rate at which an option's value erodes as time moves forward. It is a reflection of the diminishing extrinsic value of the option (the amount of additional value to its dollar moneyness). As time passes, the value of an option diminishes (all other factors held constant). This is because the probability of the option expiring profitably for the holder decreases as the expiration date draws near. Another way to view this is that if options are bets (or insurance), bets with a longer time to actualize should cost more because they are more valuable. Thus, as time passes the value of that bet should decrease. Consequently, options with longer maturities tend to have lower Theta values compared to options with shorter maturities. This is because there is much more time for the premium to decay over, and the daily decay rate is slower.
Understanding Theta is essential for traders as it can have a significant impact on their options strategies. For example, if you're an options seller looking to profit from time decay, you might prefer to write options with high Theta. Conversely, if you're a buyer, you'll want to be cautious of Theta eating into your option's value over time. Additionally, Theta is not linear; it accelerates as an option approaches its expiration date. This nonlinearity emphasizes the importance of timing in the options market and highlights how precisely tracking Theta can be a game-changer in crafting profitable strategies. So, whether you're a seasoned options trader or a newcomer, understanding Theta and how it influences options pricing is a crucial step toward enhancing your options market acumen.
This week Bitcoin and ETH show larger than average combo spread volumes on Deribit / Paradigm. Top 3 combination spreads for Bitcoin are over double the volume normally seen. Given the bullish price action it is not surprising to see call based spreads dominating BTC volume this week. BTC Deribit block trade data shows that the biggest volumes were in call diagonal spreads, call spreads, and risk reversals (29.4%, 27.2%, and 18.3%). Ethereum shows the highest volumes in risk reversals, strangles / straddles, and call spreads (31.3%, 26.9%, 22.6%).
BTC Combo Spread Volumes:
ETH Combo Spread Volumes:
***Data and insights as of October 23rd, 2023 12:00:00 UTC
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