Vol Commentary – Week 43, 2022

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

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October 26

Crypto has finally experienced a regime shift from the depressed realized vol levels of October

1. Equities rallied towards the end of last week, driven by a few central bank speakers toying with the idea of slowing rate hikes to prevent overshooting (Friday saw US 2Y yields down 13bps, S&P up 4%). Crypto initially ignored this as the market extrapolated the October underperformance relative to implied vols and lower correlation with equities.

2. Tuesday finally saw the asset class perform (ETH up 10% and BTC up 5%). We believe the move was technical in nature, with significant reallocation to risk assets as shown by the move in a previously oversold DXY. ETH had been itself depressed relative to BTC, with the cross sitting close to cycle lows despite successful completion of the merge.

3. Despite the outsized moves, vols are still near the lows, with ETH 7-day implied vol at 78. The end of last week saw paper smartly picking up cheap gamma as we approach FOMC and CPI in early November.

4. We believe the bigger macro picture has not changed, thus the probability of a retracement is higher than what the market is implying. The greater than expected CPI readings of midOctober set in stone the expectation of an upcoming 75 basis point rate hike. There has been no data to suggest that the FED will pivot, thus little chance that they will diverge from their firm stance of bringing down inflation expectations (recall Powell’s Jackson Hole speech in August bringing risk assets back to the ground, after markets misread the FED and tried to price in a July pivot). Given the repeated stressing of maintaining contractionary conditions until the data clearly suggests otherwise, we doubt Powell will change his tone enough to meet current market pricing and risk seeing his credibility called into question again.

Buy delta-hedged ETH 11Nov 1400 Put

• The recent rallies have shifted front end skew towards the call, meaning puts are relatively cheaper to buy than before. Given the potential retracement discussed in (4), this could be a profitable time to buy puts.

• As noted in (3), vols are still far below their highs, so buying gamma is also relatively cheaper than before. The 11th Nov expiry captures both FOMC on the 2nd and CPI on the 10th. Consequently, this expiry is going to be naturally bid up in anticipation, especially given that the FED will need to address the current pricing in of a pivot.

• Big tech earnings came in weak on Tuesday after hours, providing further downside.

• The put costs 0.0332 ETH ($50.46) at ref spot 1520, with an implied vol of 80.8.

• Gamma hedging the structure could help capture some of the realized vol leading up to the event, especially given that 10% moves in ETH are back on the table.

• By delta hedging at ref price 1520, the trade becomes a gamma play. Even if the market continues to rally, the trade has the benefit of also making profit if held to expiry and spot rallies to above 1788.