Industry

Weekly Commentary: Reposition

Block Scholes
Weekly Commentary: Reposition

Implied volatility continued its sensitivity to macroeconomic uncertainty as traders unloaded optionality in the minutes after the announcement of a 25bps rate hike on Wednesday. The days since have seen a fall in both realised and implied volatility, with the latter not limited to the ATM strike level. The skew of the volatility smile has trended negative once more, owing to a sharper fall in the implied volatility of OTM calls relative to the fall of OTM puts in the last few days.

Volatility near to FOMC meeting

Figure 1 At-the-money implied volatility at a 1 week tenor for BTC (orange) and ETH (purple) from 12:00 UTC 22nd Mar 23 to 12:00 UTC 23 Mar 23. Source: Block Scholes

  • The at-the-money (ATM) implied volatility of BTC and ETH options fell sharply near to the announcement of a 25bps rate hike by the FOMC at 18:00 UTC on the 22nd March.

  • This continues a trend of elevated volatility expectations before a monetary policy announcement falling in the hours that follow it.

Realised Vol is trending downwards

Figure 2 Hourly BTC standard deviation of log-returns with a 7-day lookback window (grey) and 1-week tenor atthe-money implied volatility (orange). Source: Block Scholes

  • The fall in implied volatility is matched by a similar fall in realised volatility.

  • Over the last 7-days, BTC’s spot price has moved with a similar volatility to its behaviour during the periods between the three rallies in the first quarter of this year.

Skew positioning

Figure 3 Hourly BTC 25-delta risk reversal (orange), 25-detla put implied volatility (pink), and 25-delta call implied volatility each at a 1-week tenor over the last two weeks. Source: Block Scholes

  • BTC’s risk-reversal has trended negative over the last couple of days, with a small recovery in the early hours of this morning.

  • This downwards trend was due to the implied vol of OTM puts rising faster and selling off slower than OTM calls with the same delta.

  • Both wings of the volatility smile have dropped during the same period in conjunction with the movements of the ATM level of implied volatility.

Thanks to Andrew Melville, Block Scholes

Related articles