Desk Commentary: Quarter Past, Q2

As the second quarter wound down, the crypto derivatives market found itself in a two-speed transitional phase.

On the one hand, strike cleanup and housekeeping, principally by dealers, have dominated short-dated options flows as some choose to cross-bid/ask and close out risk. The block-traded tape saw multi-thousand unit 30-June bitcoin call spreads print with blasé regularity. Meanwhile, others being less aggressive, elected to ping away in clips of 50 at extant, still-burgeoning OI, principally at the $30,000 strike where greater than 13,000 units rest. This has acted as a powerful if supportive magnet into the last hours of Q2.

On the other, an increasingly entrenched secularly bullish sentiment amongst directional, fundamental, crypto native, and cross-over players, including marquee macro names. This has set the tone for medium and long-term flows where RFQs ranging from wingy mid-curve call spreads to Q4 25 delta upside plays via thousands of seagulls to more modest but steady demand $60,000-$100,000 strike bitcoin calls a year out.

In particular, large takers who successfully rode deltas into the late Q2 rally are now taking an increasing consensus view that implied volatility at the 45-50% level for atm risk offers something of a fair value proposition. Additionally, they take the view that directional leverage via options is a quantitatively sound way to express their commitment to the consummation of crypto’s ultimate institutionalization at the hands of ETF providers. It’s likely that over provisional approvals have begun to center on the technical revelations of their filings, including the innovative Surveillance Service Agreement deployed by BlackRock, Fidelity and ARK. That’s added fuel to the fire of belief in better times ahead, as has the recently announced new trading consortium EDX.

Volatility trades in the wake of June’s abrupt 25% five-day rally have not, however, been the sole mechanism by which spec flows in crypto have exhibited just how fast things can move in the world of crypto and why convexity is at times in urgent demand. For example, the Grayscale Bitcoin trust discount to NAV rapidly narrowed toward the 30% level as proponents publicly contend that the management fee amounts to a sort of option premium. In comparison, long-suffering acolytes of proof-of-work authenticity found relief in the form of Bitcoin Cash which rallied spectacularly by over 100% in mere weeks after being named one of the lucky winners of EDX’s chosen four tokens (BTC, ETH, LTC and BCH).

Beyond that, and perhaps most spectacularly in the linear derivatives space, the June/July CME spread erupted from $300 to $500 in mere days, pushing the implied negative carry for longs in front-month futures and futures-based ETFs to levels not seen since the heady days of 2021. That degree of intensity similarly found expression in call skew, which sits at the height of 2023’s two-quarter upswing and has begun to approach prior bull market norms.

In short, the Q2 closeout has demonstrated that crypto participants at large are willing to believe in renewed sustenance and galloping momentum for their favored foals as prices for the apex POW chain are thought to be primed for a renewed run for higher.

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