The Bitcoin Implied Volatility Surface saw a major downward shift this week across all expiries as bearish price action took over spot markets. August now sits at 36 and closer expiries fell even lower, while September and later vols dropped about 3 points with March 2024 now sitting at 48.5. Long vega holders in September and further certainly felt the pain, as a 3 point vol move becomes quite significant as vega (price sensitivity to IV) linearly increases with tenure. Interestingly this seems to be a continuation of a statistical relationship noticed a few weeks ago during the bullish run to $31,000; positive spot-vol correlation. During that period of rising price, implied volatility also rose, and now we see that during falling prices, implied vol also dropped. This is the opposite of the negative spot-vol correlation dynamics usually exhibited in equity markets. The rationale is simple; overpricing or protection is caused more by fear, which is usually correlated to downside. In crypto markets it seems that now positive spot-vol correlation is the norm as the market tends to price options higher in tandem with rising prices.
Despite the sharp drop in prices and falling implied volatility, skew seems to remain in positive territory. This is especially interesting when considering that volatility skew is highly correlated with spot market direction and is still the most positive (towards the call side) for further dated expiries. It seems the recent drop in prices did little to shake the option’s market relative pricing of calls vs puts.
Digging into the block trade data shows biggest volumes in Call Spreads, Call Ratio Spreads, and Call Calendar Spread with 1504.4, 1,184, and 968 contracts traded respectively (24.7%, 19.4%, and 15.9%).
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 while the movement is the same, ATM vol for ETH is roughly 2 points lower than BTC’s. This is consistent across all expiries. This gives rise to possible questions like “why is ETH vol consistently lower than BTC?”, or “how long will ETH vol remain lower than BTC?”. Both of these questions open up avenues for exploration and statistical analysis, and no doubt there are traders looking into pairs trading the implied volatilities of these assets.
Digging into Ethereum volume data we see generally the same patterns as in BTC with slightly more volatility selling in the near term expiries. This week, block trade volume in ETH shows the majority of combination spreads being taken in Risk Reversals, Straddles / Strangles, and Call Calendar Spreads at 3,000, 975, and 500 contracts traded respectively (63.5%, 20.6%, and 10.6%).
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.