In this week’s Desk Commentary, we take a deep dive into the market movements on top of both CPI and FOMC.

  • The limbo between CPI and FOMC felt a fitting proxy for the purgatory that’s plagued crypto markets since the FTX-driven fallout found a natural near term bottom.
  • Upward impetus in spot after yesterday’s 7% inflation figure was met with a modest deluge of supply of vol, as vega buckets dropped a quick 2-3 points from Monday’s relatively firm close. Friday gamma clung to a bid pre FOMC given the rate-rise event risk, with Friday IVs pricing less than three and four percent daily moves in BTC and ETH respectively.
  • The option market consensus has manifestly embraced an outlook for muted moves through year end, with 30 Dec atms sub 50 and 70 for those same majors, and notwithstanding the brief pop in spot into the minutes just before 2pm as gamma shorts appeared to bid spot against the substantial short OI in strikes above, vol was given immediately post number.
  • The aforementioned IV levels that have held relatively constant throughout the last two weeks as vol of vol compressed in a 5-6 point range may be tested (to the downside) if we cannot break away from the current 1300 and 18k and pins.
  • Yet there’s been continued interest – at an institutional level – in mid  to longer term vol.  On the one hand, outright buys and calendar and call spreads remain a feature as players set up their strategies for the year ahead and contemplate a potential for spot to slide to the 25 delta portion of the present smile and beyond, while vol desks and premium sellers use any uptick in listless backend or fast-sliding near atm quarterly expiries to lob out vol into a market lacking firepower to hold a bid in more than a few thousand dollars of vega, as was properly in evidence after the 2pm rate decision.
  • That all being said, crypto options often seem to have a surprise in store, and with markets already slipping into a holiday-induced coma, sizable open interest at the 19k and 20k strike in BTC beckons as a potential, if lower probability outlier for a year end squeeze.  ETH OIs for 30Dec demonstrate relatively more congestion with 70,000, 60,000 and 50,000 units of exposure at the 1300, 1400 and 1500 strikes, representing a sizable amount of congestion.  That is, of course, assuming that at least some of that inventory rests in hands with the capacity and obligation to dynamically hedge the exposure, which, with both dealer and buyside books winding down rapidly (or indeed already shuttered), and with retail sized participation representing an increasing portion of volumes, there is no guarantee that large pins cannot act as painful magnets in a teleportation higher with gamma already all but left for dead.

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