Desk Commentary: Heat Wave

Major equities continued to press higher before an abrupt reversal, while cryptocurrencies remained lethargic as the midweek FOMC decision to raise rates brought little clarity for digital assets. After days of torpor, there was still limited excitement even into the July expiration, which saw the evaporation of 25% of open interest (OI). Not even a 2-3% sell-off in precious metals or a potentially meaningful shift in BOJ rate targets could jar major cryptocurrencies from ostensible slumber.

As 30-day realized volatility (RV) declined below 30v, BTC and ETH continued to trade below 30k and 1900, respectively, as the week drew to a close. Commensurately, front-end ATM implied volatilities (IV) for BTC and ETH trended lower in sympathy with realized, as positive spot/vol correlation persists. However, the term structure for both majors remains in contango, exacerbated by a spooky squeeze higher in longer-dated tenors supported over the last 24 hours. This saw December strikes levitate well above 40v and the March tenor push nearly to 50 before size sellers of at the money straddles and 40 delta calls dumped six digits of ice-cold Vega on the market, chilling the nascent rally in IVs.

Moreover, in keeping with upward progress in spot, the monthly 25-day Call-Put Skew shifted towards lower call premiums. The Genesis derivatives desk saw players strapping on size call spreads, dumping far OTM upside strikes on dealers.

The market now feels positioned with a split between secular bulls and tactical bears, with size spot flows overwhelmingly featuring sellers and short-dated options supply remaining unabated as the BTC ETF aspirations have withered in the summer heat and prospects of monetary easing are pushed out well into 2024.

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