Cumberland is commenting on the recent volatility and potential opportunities to take advantage of it.
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2024 has been a headline-rich year already, but the headline which will likely be most impactful for crypto markets over the long-term has not happened yet: the results of November’s US elections. On the face of it, the Democratic party has been seen as hawkish to digital assets; the past four years of aggressive regulation has come with a Democrat in the White House. At the same time, Republicans have signaled support for crypto, both in the House and in Trump’s speeches (though the speech he gave at Bitcoin Nashville was seen as a disappointment by the market). Over the past month, Kamala Harris stepped in for Biden, and in doing so dramatically increased the likelihood of Democrat success in November. It’s likely no coincidence that crypto has struggled over the same period. Since July 21, when Biden announced he would drop out of the race, equities are slightly higher (0.6% in the SP), but BTC is down 12%.
Trading BTC directionally based on expectations of November is challenging. While Harris has surged in the polls, the Democrats started in such a weak spot that the “surge” is enough to bring things to an essential toss-up. While the most recent national polls show Harris with a 1-2% lead, that equates to a dead-heat toss-up when the Electoral College is taken into account; Polymarket has the race trading at even money. However, any time there is a defined event which leads to a high degree of uncertainty, options traders take notice. Delta-neutral calendar strategies take advantage of the fact that, while we don’t know if BTC will go up or down after the election, we can say with a high degree of confidence that it will have a significant move in one direction or the other. Straddles (long both the call and the put, thereby being delta-neutral but profiting from high-volatility moves) expiring immediately after the election should, therefore, be more expensive than the same straddles in October. This is why Deribit listed an option expiring specifically on November 8th, in anticipation of demand for this post-election volatility.
We’re seeing a premium, but not to the extent that one would expect. The November 8th at-the-money straddle is currently trading around 60% volatility, which is only a 5% premium to what we’re seeing in October (55%). To express the view that the election will bring added volatility to crypto, one could buy the November straddles; alternately, to avoid exposure to volatility movements between now and the election, one could purchase the November straddles and sell the October straddles (this also has the benefit of lower capital outlay).
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