The Futures Focus - 07.24.2023
July 24, 2023


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%).


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