Weekly Commentary: Front Falls Further

The steepness of BTC’s at-the-money implied volatility term structure has been growing over the last few months. This leaves implied volatility at the front-end of the term structure nearly 15 vol points lower than options struck at a 6-month tenor. We note that movements in the front-end of the term structure are far more reactive to changes in sentiment, meaning that historically we have seen the term structure invert when implied volatility rises sharply as short-tenor options outpace the increase at longer dated options.

A Steepening Term Structure

Figure 1 Hourly spread of 6-month tenor ATM implied volatility to 1-week tenor ATM implied volatility since March 1st 2023. Source: Block Scholes

• We measure the steepness of the term structure by the spread of implied volatility at the 1-week tenor to the implied volatility at a 6-month tenor.
• The term structure of at-the-money implied has been growing steadily steeper since early March.
• That growth has accelerated somewhat since late June.

Falling Front End

Figure 2 Term structure of ATM implied volatility of BTC at 10:52 15/8/23 UTC snapshot (dark yellow, left axis) and 00:00 17/3/23 UTC snapshot (light yellow, right axis). Source: Block Scholes

• The increase in the gradient has been caused by the front-end of the term structure has drifting lower relative to the far-end, and in tandem with the fall in outright volatility level.
• The last time that we saw an inversion in the gradient was in March, when the outright level of the volatility surface was some 20 vol points higher than it is today.
• Inversions of the term structure of at-the-money volatility (when the implied vol of short tenor options is higher than the implied vol of longer-dated options) often occur during large spikes in outright level of volatility.

A Reactive Front-End

Figure 3 Hourly 1-week (orange) and 6-month (pink) tenor ATM implied volatility and the spread between them (yellow) since March 1st 2023. Source: Block Scholes

• We can see the faster fall in the front-end of the term structure by comparing the levels of implied vol at a 1-week tenor and the 6-month tenor in Figure 3.
• Whilst both have fallen, the 6-month tenor level has remained relatively strong.
• In contrast, the implied vol of a 1-week tenor option has moved more erratically, causing the spread that we observe.