Last week can be characterized by a massive bullish trend that started on Monday and continued throughout the week. BTC started out at $36,770 and, by Friday, reached $38,700, while ETH went from $2,000 to $2,100. Over the weekend, price action took a small break, only to resume pushing again on Sunday afternoon, opening this morning at $41,200 ($2,200 for ETH). Futures basis continued to expand, and December, March, and June futures now sit around 13%, 11%, and 9.5% annualized. Meanwhile, TradFi markets remained relatively stable, as ES ranged around the massive resistance price of $4,600 throughout the week.
Implied volatilities oscillated a bit since last week, but overall levels remained the same. BTC front-end vols (very short-dated expirations) lifted to about 50 vol, but a steep term structure can still be seen as March and June vols sit at 58.33 and 59.45. ETH’s vol surface, however, did lift, with front-end vols now at 55, mid-term vols around 59, and further-dated vols like June lifting about 2 points and now sitting at 61. What is interesting to note is that massive negative gamma sits at these current price levels. This is very significant because if market makers are heavily short gamma, then as the price sharply rises they must buy spot to remain delta-hedged on their options positions. Loosely speaking, this means that they will create further upside demand in spot markets and increase upward momentum.
The coming weeks before the Dec 29 expiry will be pivotal in terms of how price action evolves in Q1 2024. Monitoring open interest at the Dec 29 expiry, as well as at various strike levels, will be crucial in understanding how and which positions are rolled into further months. Rebalancing of hedges and demand for upside/downside volatility will heavily impact which way market makers need to hedge and thus impact spot price movement. Factoring in institutions and funds preparing for ETF decisions, expect to see increased volatility coming into the end of the year.
Digging Deeper - Volume Analytics
Diagonal spreads continue to dominate combo spread volume in both BTC and ETH. The combination of steep skew and term structure make selling further dated OTM calls against shorter dated lower strike calls an effective and cheap way to play upside vol. This week we also see increased combo spread volumes in both BTC and ETH. Given increased momentum in spot markets, options expiries approaching, and end of year rebalancing we expect to see sustained higher volumes in derivatives markets.
BTC Combo Spread Volumes:
ETH Combo Spread Volumes:
***Data and insights as of December 4th, 2023 12:00:00 UTC
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