BTC Vol Pops on Violent Technical Breakout

Technical Milestones for BTC and ETH

Bitcoin’s price has surged past the $38,000 resistance level with remarkable strength and minimal dips. The rise is getting parabolic as it approaches $45,000. Contrary to expectations that the impact of Bitcoin’s potential ETF approval had been almost fully accounted for, this upward trend suggests strong market confidence in the likelihood of a Bitcoin ETF launching early next year.

Bloomberg Intelligence predicts a decision window for this ETF news between January 5th and 10th. This anticipation is driving a surge in market interest, as fear of missing out (FOMO) builds up.

Ethereum is also experiencing a similar surge as speculation grows about its own ETF. Notably, Ethereum futures on the Chicago Mercantile Exchange (CME) are now trading at a 5% premium compared to Bitcoin, and Ethereum’s open interest on CME is also rising. This trend indicates that traditional finance sectors are beginning to show interest in Ethereum, although the ETH/BTC cross rate is retesting the lows due to recent BTC outperformance.

Factors supporting this bullish trend include an increase in global M2 money supply, the upcoming Bitcoin halving, and a potential Fed pivot next year, with over 100bp of cuts anticipated in 2024.

What’s more, investment products witnessed inflows of $176m last week, marking the 10th consecutive week of such inflows. Additionally, most on-chain metrics are showing strong growth, with total adjusted on-chain volume increasing by 29.8% to $255b in Nov, led by BTC and ETH.

BTC Realized Vol on the Rise

Bitcoin’s realized volatility recently dipped below 30% but rebounded to near 40% following its climb to $44,000. Ethereum’s realized volatility also decreased last week, stabilizing around 38%, as its price increase was less dramatic than Bitcoin’s, although it has also rebounded on the latest move.

Implied volatilities have risen alongside spot prices, particularly as key resistance levels were broken, fueling concerns about more volatile movements driven by a surge in fear of missing out (FOMO). The initial key target for Bitcoin was $42,000 which gave a short pause to rally, but that level is now history, as the asset keeps rising to currently top out just short of $45,000.

Volatility carry remains positive for both Bitcoin and Ethereum, suggesting an orderly market trend. Given this situation, we anticipate gamma sellers to become active again this week following the recent price break, assuming spot finds some equilibrium up here.

With implied volatility increasing, selling weekly calls in Bitcoin might be a viable strategy again. Our previous short positions were covered following the break above $38,000, in anticipation of further upward movement.

Firmer Term Structures

This week, the term structure for Bitcoin showed a slight increase, primarily in the short term. Gamma buckets for up to a one-month duration increased significantly, around 5-8 vol points.

The January 26, 2024, expiry is still marked by event volatility due to the established window for ETF approval between January 5th and 10th. The long end of the curve also saw a firmer stance by approximately 1.5 vols.

Ethereum’s term structure experienced a similar increase this week. The short end of its curve rose about 3 vol, while the March 2024 options were less well bid, with many options being rolled over to June 2024. Ethereum’s long-term volatility outperformed Bitcoin’s, with a nearly 3 vol increase, in line with the short end expiries.

ETH/BTC Vol Spread Grinds Higher

Despite Bitcoin leading the recent rally, the volatility spread between Ethereum and Bitcoin continued to increase this week. Currently, the entire curve trades with 0-2 vols Ethereum vol over.

If the Ethereum/Bitcoin spot spread hold current major support levels, there is potential for this vol spread to rise further in Q1 2024. This is expected as the market anticipates Ethereum to drive an upside break with greater opportunities ahead.

While there is still interest in chasing the Bitcoin movement to fully account for the expected ETF approvals in January 2024, the market is likely to shift focus, especially at the long end of the curve, placing a larger premium on Ethereum volatility from June 2024 onwards.

BTC and ETH Skew Converge Again

The skew between Bitcoin and Ethereum is aligning once more, as Bitcoin’s call skew decreases and Ethereum’s recovers. Both assets currently exhibit a minor call premium in the short end, which expands to about 6-7 volatilities in the longer end of the curve. The flattening of the front-end skew suggests a temporary halt in price movement.

Over the next month, leveraging any relative strength in Bitcoin to engage in call switches (long ETH/short BTC) remains a preferred strategy for 2024. We recommend using far out-of-the-money options, like 10-15 delta, to minimize market noise and focus on significant relative re-rating in Ethereum, which appears to be undervalued in the volatility surface.

The strong bid for Ethereum’s long-term call skew, comparable to Bitcoin’s, confirms that option traders are considering the Ethereum ETF approval scenario, but are trading in line until the Bitcoin narrative unfolds.

Option Flows And Dealer Gamma Positioning

The volumes in Bitcoin options remained stable at around $6 billion last week. Prior to the recent price surge, there was significant activity in call spread buying for the December 29, 2023, expiry, specifically buying 40k and selling 45k strikes. Following the surge past 40k, there was notable profit- taking in December 29 calls at the 40k and 42k levels, which helped moderate volatility.

Ethereum’s options volume decreased by about 10% to $2.5 billion. Last week’s activity mainly involved call spread buyers for the January 26, 2024, expiries (2400/3000 and 2600/3200) and the rolling of March 2024 calls into June 2024. Since Bitcoin’s recent upswing, Ethereum’s market flows remain bullish, particularly for longer expiries like January 2024, with less profit-taking.

Bitcoin’s dealer gamma positioning became more negative as it broke past 40k, but has somewhat recovered due to profit-taking in December calls. The latest push up to 44k has neutralised the positioning even more as we gravitate towards dealers long 29Dec 45k calls (part of call spread structures).

Conversely, Ethereum’s dealer gamma moved back into positive territory and has been steadily increasing. The selling of local gamma is providing dealers with inventory, and unlike Bitcoin, Ethereum hasn’t seen a significant influx of outright call buying, even with the break above 2150.

Strategy Compass: Where Does The Opportunity Lie?

Given that we’ve such a wild move, in practically a straight line, and now dealer gamma positioning looks cleaner. We think there may be a nice opportunity to start call overwriting with weekly calls again. Only covered calls selling in this crazy market! Stay safe out there.

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