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This week, the downwards trend of the IVS (Implied Volatility Surface) continued to prevail and brought us yet again to surprising new lows. Around Thursday of last week, the front end of the curve broke 30 vol and settled around 20 vol, officially marking new all time lows in Bitcoin implied volatility. The pattern of positive spot vol correlation also seems to hold as again this drop in vol followed a drop in spot price. Currently, expiries under 2 weeks sit between 24 - 30 vol. As seen in the term structure view below, mid term vols sit between 30-40 now, while further expiries December, March, and June sit at 42, 46, and 49 vol. This erratic movement in volatility again created quite a steep term structure so we expect to continue seeing large activity in calendar and diagonal spreads. Skew was affected by recent price action with mid - short term skew going negative but further dated skew still remains positive as March and June 2024 still exhibit much heavier call side skew.
Ethereum’s volatility surface continues to move in tandem with BTC’s, exhibiting virtually the same movement across all tenures. The main difference that can be seen is that ETH IVs are consistently 0.5 - 1 vol under BTC for each tenure. Additionally, the downwards price action affected ETH’s iv skews harder than BTC’s with ETH’s mid term smiles exhibiting much more pronounced put side skew.
As mentioned previously, this recent bearish momentum only continued previous trends of dropping implied volatility levels and positive spot-vol correlation. Selling BTC vol to purchase ETH vol seems like a play that can be explored further but generally dispersion trades (implied correlation trades) or long / short vol trades between BTC and ETH are certainly plausible given the somewhat established equilibrium between their respective vol markets. There are many versions of this trade that can be taken other than outright long vol - short vol, for example long skew - short skew, but whichever feature of the vol structures traders may choose to play it is worth noting that there are numerous technicalities involved and all trades should be diligently tested and researched before implementation.
Digging deeper into block trade data and Paradigm execution data we see the biggest volumes in Call Spreads, Risk Reversals, and Strangles / Straddles (37.3%, 26.8%, 17%). Paradigm tape showed multiple executions in short Calendar Spreads with March being the latter month as well as further dated Call Spreads. This makes sense with the current vol structure given the steep term structure and the relatively high call - side skew in march. Traders would “bet” on term structure flattening out precisely by selling further dated expiries while buying closer dated. Additionally, Call Spreads benefit from high skew since the higher strike call would yield more premium. If a trader wants exposure to both term structure and skew, he/she can take a diagonal spread which is a long / short position in options of different expiries and strikes (essentially a mix of a calendar spread and a vertical spread).
Ethereum volume data generally exhibited the same patterns as BTC but with much higher concentration in RR’s and Diagonal Spreads. This week, block trade volume in ETH shows the majority of combination spreads being taken in Risk Reversals, Call Diagonal Spreads, and Straddles / Strangles (45%, 31.5%, and 11.7%).
BTC Combo Spread Volumes:
ETH Combo Spread Volumes:
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