Cumberland is commenting on recent low volatility and potential opportunities to take advantage of it.
For further information about Cumberland, please visit Cumberland website here.
October 18
Summary
• ETH vol looks attractive.
• Low delta puts to protect against downside surprises.
Realized vol remains depressed
• Realized vol has been extremely low and was down to low 40s/30s for BTC & ETH respectively until the slight rebound this past weekend.
• Short dated options have underperformed due to low realized volatility.
Potential opportunities to take advantage of the low vols
• ETH 1,325 straddle now priced at around $130.
• While volatility has been dampened in recent days, large price swings could still happen.
• We saw ETH moved from ~$1,800 to ~$1,300 post merge, and falling to $1,155 from $1,294 within a singled day last Thursday before rebounding.
• BTC vol for OCT 50D options now ~50, where crypto vol has historically realized higher despite recent trends.
Put buying for a rainy day
• Put/Call on short dated ETH 25D risk-reversals fell to puts being ~6% over calls, and it could be a good time to buy puts to shore up any downside risk.
• Market participants worried about downside surprises from on going war in Ukraine or unexpected hawkish comments from the Fed might consider deep OTM puts given attractive pricing.
Flows
• We saw continued call spread selling on ETH, contributing to the decrease in vol last week.
• BTC vol vs ETH vol ratio reached YTD highs last week, before subsiding to lows 80s currently, which is still at the high end of the range.
October 21
The low volatility in BTC and ETH has been much-discussed recently, but there have been some intriguing signs of life in other parts of the market.
Notably, correlation across cryptocurrencies has been fairly low, so even while ETH has been moving sideways, there has been good price action in crypto. In particular, the OG DeFi tokens have started to show real life. Since September 23, a period over which ETH has been unchanged (and had an 8% range), MKR is up 66% and SUSHI is up 24%, both with significant trading ranges (80% and 40% respectively). These moves are headline-driven, though some of the moves have trickled into the rest of the sector, with AAVE and UNI outperforming during this period. On the OTC side, we’ve seen good flow on SUSHI, COMP and AAVE in the DeFi sector. Of the three new coins we’ve listed this week (OP, DYDX, and LDO), we’ve seen the most interest in LDO by a significant margin.
In the vol space, low realized vol has led the front end of the term structure to cheapen significantly, with one-week vol on BTC trading at 44 while three-month vol is closer to 60. This of course makes sense, with realized around 30, but we’ve started to see options traders stepping in to pick up gamma, particularly puts in the first few weeks of November, as protection against weak CPI or NFP. With vol low, short-dated puts are a relatively cheap way to maintain an overall long delta while limiting downside that could come as a result of weak macro data.
For any counterparties interested in trading OP, LDO, or DYDX on Marea or our API, please reach out to an RM as this will be enabled next week. If you have interest in reading our recent analysis of the Grayscale Trust (GBTC), please reach out to an RM.
Disclaimer
The information (“Information”) provided by Cumberland DRW LLC and its affiliated or related companies (collectively, “Cumberland”), either in this document or otherwise, is for informational purposes only and is provided without charge. Cumberland is a principal trading firm; it is not and does not act as a fiduciary or adviser, or in any similar capacity, in providing the Information, and the Information may not be relied upon as investment, financial, legal, tax, regulatory, or any other type of advice. The Information has not been prepared or tailored to address, and may not be suitable or appropriate for the particular financial needs, circumstances, or requirements of any person, and it should not be the basis for making any investment or transaction decision. THE INFORMATION IS NOT A RECOMMENDATION TO ENGAGE IN ANY TRANSACTION.
If any person elects to enter into transactions with Cumberland, whether as a result of the Information or otherwise, Cumberland will enter into such transactions as principal only and will act solely in its own best interests, which may be adverse to the interests of such person. Before entering into any such transaction, you should conduct your own research and obtain your own advice as to whether the transaction is appropriate for your specific circumstances. In addition, any person wishing to enter into transactions with Cumberland must satisfy Cumberland’s eligibility requirements.
Cumberland may be subject to certain conflicts of interest in connection with the provision of the Information. For example, Cumberland may, but does not necessarily, hold or control positions in the cryptoasset(s) discussed in the Information, and transactions entered into by Cumberland could affect the relevant markets in ways that are adverse to a counterparty of Cumberland. Cumberland may engage in transactions in a manner inconsistent with the views expressed in the Information.
Cumberland makes no representations or warranties (express or implied) regarding, nor shall it have any responsibility or liability for the accuracy, adequacy, timeliness, or completeness of, the Information, and no representation is made or is to be implied that the Information will remain unchanged. Cumberland undertakes no duty to amend, correct, update, or otherwise supplement the Information.
The virtual currency industry is subject to a range of risks, including but not limited to: price volatility, limited liquidity, limited and incomplete information regarding certain instruments, products, or cryptoassets, and a still emerging and evolving regulatory environment. The past performance of any instruments, products, or cryptoassets addressed in the Information is not a guide to future performance, nor is it a reliable indicator of future results or performance. Investing in virtual currencies involves significant risks and is not appropriate for many investors, including those without significant investment experience and capacity to assume significant risks.
