Derivatives Market Update - 09.05.2023
August 28, 2023

Volatility Markets - Overview

Volatility markets this week remained relatively tame apart from a spike in vol caused by the almost $2000 moves on Tuesday the 29th and Thursday the 31st. Shorter dated vols reacted more violently to the fast move up last week, however they quickly tapered back down to previous levels. At the Money implied vols currently sit virtually at the same level as a week ago with closer dated vols at 33 - 37 and longer dated vols starting at 40 and topping out at 48 for June 2024 expiry.

Although the general levels of the volatility surface did not change much, the skews of the implied volatility smiles noticeably changed after this week's price action. As can be seen from the graphs below, put side skew is prevalent in all tenures but most prevalent in shorter darted smiles. The evolution of skew over subsequently larger tenures is known as the “Term Structure of Skew” and it is currently increasing. This is because shorter dated tenures have higher skew to the put side (more negative skew) than longer dated tenures (skew closer to 0). Normally ETH vol smiles consistently exhibit this property but BTC now also exhibits negative skew, as more downside seems to be priced in.

Honing In - Term Structure

Skew refers to the relative pricing of calls and puts of equal delta around ATM (At the Money). Recall that an alternate measure of distance from ATM is delta. For example lower delta calls / puts will be further out of the money (higher strike for calls, lower strike for puts). Thus traders will usually refer to calls and puts by their deltas rather than by their strikes. To measure which side (calls or puts) the market is pricing higher, we can look at the relative tilt of the volatility smiles. If the smile is higher on the call side, all else held equal, calls are being priced at higher implied vols. The simplest measurement of skew is given by subtracting the implied vol of the put from the implied vol of the call. For example, the 25Delta skew = 25Delta Call_IV - 25Delta Put_IV. From this calculation we can see that if skew is positive, call iv must be higher and vice versa. 

Intimately related to this measure is the Risk Reversal position. The Risk Reversal is a long OTM call and a short OTM put. This is a bullish position since both of its components, the long call and the short put, benefit from an increase in price. The higher the skew, the more this position will cost since the premium paid for the call will be more than the premium received by selling the put. This agrees with intuition since a bullish market will show higher skew in options’ prices, and thus one will have to pay more to take bullish exposure with options. The price of the Risk Reversal is thus the most direct link to skew, and since normally equal delta calls and puts are used, the difference between their implied volatilities is what makes the most material difference in net premium.

***Data and insights as of September 5th, 2023 14:00:00 UTC
***Data and insights as of September 5th, 2023 14:00:00 UTC
***Data and insights as of September 5th, 2023 14:00:00 UTC
***Data and insights as of September 5th, 2023 14:00:00 UTC

***Data and insights as of September 5th, 2023 14:00:00 UTC
***Data and insights as of September 5th, 2023 14:00:00 UTC
***Data and insights as of September 5th, 2023 14:00:00 UTC
***Data and insights as of September 5th, 2023 14:00:00 UTC
***Data and insights as of September 5th, 2023 14:00:00 UTC
***Data and insights as of September 5th, 2023 14:00:00 UTC

Digging Deeper - Volume Analytics

Digging deeper into BTC Deribit and Paradigm block trade data we see the biggest volumes in  Call Diagonal Spreads, Strangles / Straddles, and Call Spreads (33.8%, 18.1%, 14%). Ethereum volume data shows a similar mix of skew based vertical spreads. The top 3 traded spreads were Call Spreads, Put Spreads, and Risk Reversals (21.7%, 21.7%, and 17.7%). Most Call Spread and Put Spread activity for both coins was long, with concentrations in September and some activity in December. 

BTC Combo Spread Volumes:

  • Call Diagonal Spreads: 2,938.7 Contracts
  • Strangles / Straddles: 1,579.7 Contracts
  • Call Spreads: 1,214.8 Contracts

ETH Combo Spread Volumes:

  • Call Spread: 6,125 Contracts
  • Put Spread: 6,101 Contracts
  • Risk Reversal: 4,975 Contracts

ETH Volume

***Data and insights as of September 5th, 2023 14:00:00 UTC
***Data and insights as of September 5th, 2023 14:00:00 UTC

BTC Volume

***Data and insights as of September 5th, 2023 14:00:00 UTC
***Data and insights as of September 5th, 2023 14:00:00 UTC

***Data and insights as of August 28th, 2023 15:00:00 UTC

Disclaimer

This research is for informational use only. This is not investment advice. Other than disclosures relating to SDM Financial this research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates, and forecasts contained herein are as of the date hereof and are subject to change without prior notification. We seek to update our research as appropriate.

Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. The price of crypto assets may rise or fall because of changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in, act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research.

The information on which the analysis is based has been obtained from sources believed to be reliable such as, for example, the company’s financial statements filed with a regulator, company website, company white paper, pitchbook and any other sources. While SDM Financial has obtained data, statistics, and information from sources it believes to be reliable, it does not perform an audit or seek independent verification of any of the data, statistics, and information it receives.

Unless otherwise provided in a separate agreement, SDM Financial does not represent that the report contents meet all of the presentation and/or disclosure standards applicable in the jurisdiction the recipient is located. SDM Financial and their officers, directors and employees shall not be responsible or liable for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses, or opinions within the report.

Crypto and/or digital currencies involve substantial risk, are speculative in nature and may not perform as expected. Many digital currency platforms are not subject to regulatory supervision, unlike regulated exchanges. Some platforms may commingle customer assets in shared accounts and provide inadequate custody, which may affect whether or how investors can withdraw their currency and/or subject them to money laundering. Digital currencies may be vulnerable to hacks and cyber fraud as well as significant volatility and price swings.

Was this content helpful?
The Futures Focus - 07.04.2023
July 4, 2023
July 4, 2023
The Futures Focus - 07.10.2023
July 10, 2023
July 10, 2023
The Futures Focus - 07.17.2023
July 17, 2023
July 17, 2023