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This week vol curves exhibited a continuation of last week’s trend of steepening term structure as at-the-money vols dropped, with the most pronounced changes in the front end of the curve (closer expiries). December vol dropped 2 points to 47.8, September vol dropped 2.6 points from 45.25 to 42.6, and nearer dated vols like July and August now sit at sub 40 levels. This steepening term structure creates an interesting opportunity to trade volatilities of different expiries against each other. Traders looking at the steep term structure of vol who believe it will revert back to a “normal” slope would want to long closer dated vols and short further dated to express this view. Intuitively this is because for the curve to flatten, the closer end must go up while the further end must go down. This week we actually saw large sizes taken in short calendar spreads, precisely expressing this view.
Interesting to note that the rule of thumb from equities, namely that term structure of at the money vol and skew are positively correlated did not show in vol curves this week. It says that the steeper the term structure of atm vol gets, the steeper the smiles in closer expiries get to the call side, but observing the avg 25 delta skew shown above we see average skew actually dropping this week, despite bullish vol buying.
Open Interest reached almost 285,000 contracts just before sharply dropping after the July 14th expiry. Just a few hours after July 14th 08:00:00 Bitcoin sharply dropped from $31,150 to $30,000 in what looked like a swift and aggressive sell-off. Likely the sell-off was partially sparked by a rebalancing of delta after positions were adjusted post expiry. This week, calls still dominated volume traded with 294,000 (36.6%) calls bought and 282,300 (35.1%) calls sold. Block trade data shows biggest volumes in Call Spreads, Strangles / Straddles, and Risk-Reversals with 1909.7, 2333, and 855 contracts traded respectively (30.6%, 37.4%, and 13.7%).
Deribit’s BTC DVOL index and historical volatility still show quite the spread between them, almost 9%. Traders are no doubt dynamically hedging and taking advantage of this spread as it is a bit wider than typically seen.
Ethereum’s volatility surface continues to show extremely high correlation with Bitcoin’s, repeatedly exhibiting similar shifts to BTC. Steepening term structure can be seen with near dated vols (<Aug 25th) moving down to 40, and September dropping 2 points down to 42.3, while December and March also move down about 1.5 - 2 points. Skew also continues to flirt with slightly negative levels as it seems ETH call selling interest ramps up due to Call Calendar spreads being sold.
The sustained correlation in Bitcoin and Ethereum’s vol surfaces opens up the possibility for correlation trading or stat-arb type trading between their vols. If traders do begin taking these kinds of exposures we would opposite direction combo trades being taken in tandem, however for now we still see very similar types of spreads being taken. Block trade volume on ETH shows very similar patterns to BTC with highest volumes being taken in Strangles / Straddles, Call Spreads, and Risk-Reversals at 37,301, 23,406, and 17,643 contracts traded respectively (36.7%, 23%, and 17.4%).
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