This past week, we saw BTC break the $25,300 to $27,000 range and finally begin showing some bullish momentum during this morning's impressive run to $27,400. The volatility surface saw a nice flat lift of about 1 point and a tilt towards the call side as skew finally went positive for most tenures. Last week, call side skew was prevalent only for longer-dated tenures, but after this morning's move, the market inevitably readjusted the closer-dated smiles as well. ETH smiles, for further-dated expiries (greater than 30 days), lifted about two points, with most of the surface also picking up positive skew. ETH continues to show lagging IV levels and skews compared to BTC. Its ATM implied vols remain 3 to 7 points below BTC's, and skew remains consistently 1 to 2 points lower
Last week we examined the concept of vertical spreads more closely. This week, we are focusing on horizontal or calendar spreads. Analogous to a vertical spread, which is a portfolio of options with the same tenure but different strikes, a horizontal spread consists of options with the same strikes but different tenures (hence why horizontal spreads are also called calendar spreads). A related concept is a diagonal spread, where both the strikes and tenures are different.
Calendar spreads can be used in a variety of ways including, premium collection, hedging, and speculation on implied volatility. For example, if someone wants to purchase longer-dated upside volatility in the form of a call option, they face the problem of theta decay. If they purchase the call too early, they may end up paying away too much premium in the form of theta decay before the upward move materializes. To remedy this situation, one can sell a closer-dated call to offset both the directional risk (delta) and the daily theta cost. The daily theta cost of the long option will be offset by the daily theta being received on the short option. The trader can continue to sell options until he/she believes the upside move will materialize at which point they stop selling options and hold the initial long position.
Let's take an example of a 3-month long call position where the spot price does not move during the lifetime of the option. If the trader sequentially sells weekly call options during the three months against their long call, the net premium received will be greater than the premium paid on the long leg. This exemplifies the concept introduced above regarding the daily theta cost being offset by the short call positions. Of course, this is just the base case where the spot price does not move, and proper care and risk management protocols must be in place to address the case where the spot begins to trend in either direction.
This week we see Deribit call / put concentrations even out for BTC and tilt back towards long call dominance for ETH. We also see more bullish vol being bought in October and November expiries as well as unwinding of previously bought downside vol (puts and put spreads). Digging deeper into BTC Deribit and Paradigm block trade data we see the biggest volumes in call calendar spreads, call spreads, and put spreads (25.3%, 20.8%, 15.2%). For ETH we mainly see call spreads dominating the combo spread volume (35.2%), but put spread and strangle / straddle volume remain prevalent as well (14.8%, and 12.7%).
***Data and insights as of September 18th, 2023 12:00:00 UTC
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