Weekly Commentary: Vol Surface Level

Crypto-asset derivative markets reflect a shift in positioning since the end of summer and into the beginning of September. Volatility expectations remain between 30% and 45% across the term structure, with ETH options remaining below those of BTC. The steepness of ETHʼs volatility smile has fallen to match BTCʼs, but both smiles remain historically steep. The positive sentiment that was previously indicated by each of the perpetual swap funding rates, future-implied spot yields, and skew towards calls has moderated following the mid-August selloff and the failure to sustain the retrace to $27K and $1.7K. The risk reversals of both assets now express a distinct tilt towards downside protection.

BTC Leads a Low Volatility

Figure 1 Hourly 1-month tenor, at-the-money implied volatility for BTC (yellow) and ETH (purple) options over the last month. Source: Block Scholes

• Spot prices have remained extraordinarily flat, with BTC and ETH holding just above the $27K and $1.6K levels.
• As a result, implied volatility has continued to remain subdued between 30% and 35% at one- month tenors, rising to 47.5% and 43.4% respectively for options expiring in 9 months.
• ETH’s option markets are pricing its volatility cheaper relative to BTC’s, continuing the trend that we have observed since September last year.

ETH Steepness Moderates

Figure 2 Hourly SABR volatility of volatility parameter at a 1-month tenor for BTC (yellow) and ETH (purple) options over the past 6 months. Source: Block Scholes

• In last week’s monthly commentary we highlighted the extreme steepness in the smiles of BTC’s, but more prominently ETH’s volatility smiles.
• The steepness in ETH’s smile has moderated somewhat to match the steepness in BTC’s smile, but both remain near to the top of their recent historical range.
• This means that options far away from the current spot price are pricing for a much higher level of volatility compared to options struck at-the-money.

Skew Tilts Towards Puts

Figure 3 Hourly 25-delta risk reversals for BTC (yellow) and ETH (purple) at a 1-month tenor over the past 3 months. Source: Block Scholes

• Both BTCʼs and ETHʼs volatility smiles have skewed further towards OTM puts.
• Whilst previously trading less pessimistically, BTCʼs have fallen further to reflect a similar sentiment to ETH options over the past 3 days.
• Despite low activity in spot markets, and historically low levels of implied volatility, bets protecting against further legs down in spot price have been in increased demand.
• This marks a distinct shift in positioning, particularly in BTCʼs derivatives markets, away from the buoyant sentiment reflected over the past few months.
• This is also reflected in the futures markets of both BTC and ETH, which both report lower future- implied yields and small funding rates after the selloff on the 18th of August.