Vol Commentary – Week 42, 2022

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

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October 18

Summary

• ETH vol looks attractive. • Low delta puts to protect against downside surprises.

Realized vol remains depressed

• Realized vol has been extremely low and was down to low 40s/30s for BTC & ETH respectively until the slight rebound this past weekend. • Short dated options have underperformed due to low realized volatility.

Potential opportunities to take advantage of the low vols

• ETH 1,325 straddle now priced at around $130. • While volatility has been dampened in recent days, large price swings could still happen. • We saw ETH moved from ~$1,800 to ~$1,300 post merge, and falling to $1,155 from $1,294 within a singled day last Thursday before rebounding. • BTC vol for OCT 50D options now ~50, where crypto vol has historically realized higher despite recent trends.

Put buying for a rainy day

• Put/Call on short dated ETH 25D risk-reversals fell to puts being ~6% over calls, and it could be a good time to buy puts to shore up any downside risk. • Market participants worried about downside surprises from on going war in Ukraine or unexpected hawkish comments from the Fed might consider deep OTM puts given attractive pricing.

Flows

• We saw continued call spread selling on ETH, contributing to the decrease in vol last week. • BTC vol vs ETH vol ratio reached YTD highs last week, before subsiding to lows 80s currently, which is still at the high end of the range.

October 21

The low volatility in BTC and ETH has been much-discussed recently, but there have been some intriguing signs of life in other parts of the market.

Notably, correlation across cryptocurrencies has been fairly low, so even while ETH has been moving sideways, there has been good price action in crypto. In particular, the OG DeFi tokens have started to show real life. Since September 23, a period over which ETH has been unchanged (and had an 8% range), MKR is up 66% and SUSHI is up 24%, both with significant trading ranges (80% and 40% respectively). These moves are headline-driven, though some of the moves have trickled into the rest of the sector, with AAVE and UNI outperforming during this period. On the OTC side, we’ve seen good flow on SUSHI, COMP and AAVE in the DeFi sector. Of the three new coins we’ve listed this week (OP, DYDX, and LDO), we’ve seen the most interest in LDO by a significant margin.

In the vol space, low realized vol has led the front end of the term structure to cheapen significantly, with one-week vol on BTC trading at 44 while three-month vol is closer to 60. This of course makes sense, with realized around 30, but we’ve started to see options traders stepping in to pick up gamma, particularly puts in the first few weeks of November, as protection against weak CPI or NFP. With vol low, short-dated puts are a relatively cheap way to maintain an overall long delta while limiting downside that could come as a result of weak macro data.

For any counterparties interested in trading OP, LDO, or DYDX on Marea or our API, please reach out to an RM as this will be enabled next week. If you have interest in reading our recent analysis of the Grayscale Trust (GBTC), please reach out to an RM.