Vol Commentary: It’s all-you-can-eat gamma, get some!

Cumberland is commenting on the recent volatility and potential opportunities to take advantage of it.

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What we are seeing in the markets

Yesterday BTC made 5-months highs. This triggered large hedging programs, likely from miners and other naturally long institutions, who sold more short dated call options than ever before. Despite high realized vol, and ahead of a heavy calendar with FOMC and US data to start the month, crypto vol is collapsing.

Indeed, over the last week, some 75k of vega was sold on Deribit, mostly in February, in BTC ATMs. 100k was purchased higher than .5 sd, but 175k were sold between -.5 and .5 sds (think 21-25k range), a result of ATM call selling OTC. Flows in ETH were a lot more mixed, with under 25k sold in the backend net. Since Monday morning, Feb raw vols are down over 5% in both products. Next week’s are down 10% and 8%! Adjusted for events, it’s an even darker picture.

As we write 2/3 straddles are priced at 51.5v and 59.5v for BTC and ETH respectively, against 10-day realized vol measured at 56 and 59 on close-close terms, but 65 and 72 when weighting intraday price action. BTC is trading on recent highs, which we find supportive of volatility, as new, FOMO positions are built while the spectrum of short liquidations continues to loom on the upside. But more importantly, the next few weeks are filled with market moving events. First we hear from Powell at the FOMC on Wednesday. Will the Fed chair alter his tone on the back of softer data and give up the defense of December dots? On Friday, NFP brings more insights into the labor market – which the Fed has turned its attention to as predictor of inflation trends. Did earnings continue to fall in January? Last but not least, on the 14th, January CPI could seal the deal on inflation as a 4th reading in a row showing slowing prices; or break the trend and make the market revise already battered expectations (1y breakevens currently trading under 2.15%).

We think that future monetary policy is still highly uncertain and the next round of data will bring insights into the pace of the easing cycle priced in 2024, with all the consequences for risk assets. Treasuries, one of the most liquid “macro” products, are pricing more than 8 extra days of variance for next week’s data, and another 8 for CPI (next week’s expiration is trading 32 vols higher than the monthly serial). Lack of liquidity in crypto options, paired with hedging needs, are providing one of the best vol buying opportunities we’ve seen in a long time.

BTC Straddle run:

2/3: 1450/1550 2/10: 1950/2050 2/17: 2350/2450 2/24: 2750/2850 3/31: 4100/4300

Potential trade

Buy BTC Feb 17th 23k straddles for $2450 (53%).

For once we prefer buying gamma in BTC which has outperformed this month, but sees most of the vol supply from hedgers using call options. Flows have largely been dominated by dealer hedging and vols still seat on the lows as we speak. the 17th expiration captures the Fed, NFP and CPI. No event weight is priced…