The pre- and post-FOMC cadence in crypto vol markets largely adhered to well established patterns: front-end implied volatility wafted higher in a vacuum through Wednesday morning even as spot stagnated with an uneasy equilibrium at 28,000 and 1,800 for BTC and ETH, respectively.
In that context, select fixed strike bitcoin IVs began to ‘flip’ those of ETH, with Friday 24 th March at-the- money mids in BTC nudging through 90% whilst equivalent options in ETH were offered there as mid-day approached in the New York session. Thereafter, following the Fed’s announcement of a 25 basis point hike, vols deflated in rapid fashion with a sawtooth set of swings in spot that tripped stops below both 28000 and 27000, as choppy price action suggested a material amount of short gamma spiking with short-dated IVs slipping by as much as 20 points from levels seen pre-release.
That’s not entirely surprising given that the trading tape over the past week has continued to be dominated by buyers of gamma (and to a lesser extent vega) across a variety of RFQs, and as such the failure to break higher towards 30k left a landscape primed for some measure of disappointment. That reckoning did not entirely limit itself, however, to bitcoin, for which larger- sized block trades have recently outnumbered ETH inquiries by as much as 5 to 1 (or more). The ETH surface’s sudden, sharp realignment in skew from 6- 10 vols over for puts as of March 10-14 th to 10 vols over for calls as of 21 st March evinces a vol market leaning slightly over its skis, and the 5+ point dip in fixed strike IVs at the 2k strike for April 28 th over the last 48 hours was a noteworthy if rational correction. That’s both because ether’s implied volatility has only begrudgingly rallied in sympathy with bitcoin IVs on higher levels of spot and because the market has been unable to slide past chunky strike inventory on dealer books at the 1700 and 1800 levels, a legacy of aggressive call- selling flows seen over the last quarter.
For bitcoin, which has witnessed a ~40% rally in ~14 calendar days, while the hours after the FOMC saw some abatement of the recent levitation in call wings, demand resurfaced with impressive vigor. Consider that, prior to the Fed announcement, 1 month 25 delta bitcoin calls sat at ~71%, some six vols above same-date at-the-money contracts and priced roughly 3% in terms of premium. After the rate hike, directionally oriented players lifted size March 31 st 20 and 30 delta calls at ~70% and 68% respectively, apparently expressing the view that the modest pullback in spot and vol (which remain inextricably bound in the current bullish regime) presents a potential buying opportunity and portending further excitement about another run to the 30,000 pin for the quarterly expiry, where nearly 9,000 units of open interest sit.
It remains to be seen whether longer-dated bitcoin upside will garner similar renewed interest. It’s worth mentioning that six-month 10 delta call wings, having reached a 78% bid prior to today’s pivotal interest rate decision, remain less than 3 vols below comparable ether options, even as IVs for both slid lower by as many points in just a few hours this afternoon. In that vein, the proximity of BTC and ETH call wing pricing represents an eye-opening display of the sharp cyclical compression of the IV-difference between these two crypto majors. In that context, we are a world away from historical spreads, and such a parity between bitcoin and ether vols feels particularly anomalous when compared to periods when 3-6 month low-delta calls in ETH have pushed well into the mid- triple digits, dozens of points higher than same-delta bitcoin vols.
Yet plays for a reversion to the mean have accordingly proven hazardous, and the overall IV- convergence seems, therefore, to reflect another facet of the broadening embrace of bitcoin’s renewed rise to prominence as a purported alternative anchor within the globally fraught traditional financial system. Time will tell whether bitcoin miners and others elect to harvest static returns by returning to sell calls in size or whether speculative appetite for upside exposure to ETH boosts IVs back toward historical norms. As concerns the former, if anything, the past practices of such participants may suggest that the marginal supply of calls does not perforce respond with immediacy to sharp price appreciations and, in some cases, may in fact exhibit an unexpected degree of inelasticity. As concerns the latter, idiosyncratic impetus from the upcoming Shanghai event may yet hold sway.
Disclaimer
Genesis Global Trading, Inc. and its global affiliates (collectively, “Genesis”) do not provide legal, compliance, tax or accounting advice. Genesis is a principal trading firm; it is not and does not act as a fiduciary or adviser, or in any similar capacity, in providing this material, which cannot be relied upon as investment, financial, legal, tax, regulatory, or any other type of advice. The information contained herein 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 NEITHER A RECOMMENDATION TO ENGAGE IN ANY TRANSACTION NOR RESEARCH MATERIAL.
This material contained herein is confidential and may not be distributed in whole or in part to anyone other than the intended recipients. Unauthorized reproduction or distribution of all or any of this material or the information contained herein is strictly prohibited. These materials are incomplete without reference to, and should be viewed solely in conjunction with, the terms and disclosures set forth on the Genesis website, which are deemed incorporated herein.
The information provided in this communication does not constitute investment advice, financial advice, trading advice, or other advice. If any person elects to enter into transactions with Genesis, whether as a result of this material or otherwise, Genesis will enter into such transactions as principal only and will act solely in its own best interests, which may be adverse to your interests. Therefore, you are advised to make your own assessment of whether a Genesis service that you are considering is suitable for you and ensure that you have the necessary experience and knowledge to understand the risks involved in relation to those particular services, transactions or investments. Prior to entering into any transaction, you should determine, without reliance upon us or our affiliates, the economic risks and merits (and independently determine that you are able to assume these risks) as well as the legal, tax and accounting characterizations and consequences. In this regard, by accepting this material, you acknowledge that (a) we are not in the business of providing (and you are not relying on us for) legal, tax or accounting advice, (b) there may be legal, tax or accounting risks associated with any transaction, (c) you should receive (and rely on) separate and qualified legal, tax and accounting advice and (d) you should apprise senior management in your organization as to such legal, tax and accounting advice and our disclaimer as to these matters. By accepting receipt of this material, the recipient will be deemed to represent that they possess, either individually or through their advisers, sufficient investment expertise to understand the risks involved in any transactions or services discussed herein and that they have not relied in whole or in part on any of the information provided by Genesis in making such determination.
The trading of digital currency as herein described is an inherently risky activity. Digital currency does not benefit from the protections afforded by the Securities Investor Protection Corporation. A counterparty’s ability to enter into derivatives with Genesis depends on satisfying a number of regulatory requirements imposed on derivatives under the Dodd–Frank Wall Street Reform and Consumer Protection Act and applicable law.
Any prices or levels contained herein are preliminary and indicative only and do not represent bids or offers. These indications are provided solely for your information and consideration, are subject to change at any time without notice and are not intended as an offer to sell or a solicitation to purchase any financial instrument. Nothing contained herein shall constitute any representation or warranty as to future performance of any financial instrument, credit, currency rate or other market or economic measure. In preparing this material, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was otherwise reviewed by us. Genesis does not make any representations or warranties, express or implied, as to the accuracy or completeness of the information provided herein. Any estimates included herein constitute our judgment as of the date hereof, are subject to change, may or may not be realized, and are not a complete analysis of every material fact. We and/or our affiliates may make a market in these instruments for our customers and for our own account. Accordingly, Genesis may have a position in any such instrument at any time.
Genesis and Genesis Trading are marketing names for certain businesses of Genesis Global Trading, Inc. and its global affiliates and if and as used herein may include as applicable employees or officers of any or all of such entities irrespective of the marketing name used. Products and services may not be available to all counterparties or in all jurisdictions. Securities and digital assets are not deposits or other obligations of any commercial bank, are not guaranteed by any commercial bank and are not insured by the Federal Deposit Insurance Corporation. GGC International Limited is incorporated in the British Virgin Islands (“BVI”). Genesis Global Trading, Inc, a Delaware corporation, has been granted a Virtual Currency License by the New York State Department of Financial Services and is registered with the U.S. Securities and Exchange Commission as a broker dealer. Genesis Asia Pacific Pte. Ltd. Is a private limited company organized under the laws of Singapore. Genesis Global Capital, LLC is a limited liability company organized under the laws of Delaware. Genesis Custody Limited is registered as a cryptoasset business with the UK Financial Conduct Authority.
© 2022 Genesis Global Trading, Inc. All rights reserved. “Genesis”, the Genesis logo, and other Genesis trademarks and service marks referenced herein are trademarks and service marks of Genesis and are used and registered throughout the world.
AUTHOR(S)
Genesis is a global leader in institutional digital asset trading, lending, derivatives, custody and prime brokerage services.