In this week’s edition of Option Flows, Tony Stewart is commenting on a long easter weekend, BTC Spot unmoved and a buyer of 1.5k BTC 7day 40k Puts.

April 16

Buyer of 1.5k BTC 7day 40k Puts was conspicuous at the start of a long Easter weekend when global influences are light and BTC Spot unmoved. Several justifications – Imminent bearish, Easter liquidity concerns, Protecting long Spot, Long gamma risk-reward play… Let’s delve:

2) First, the current state of play: BTC sits above key number support at 40k, ETH at 3k. Dips below have been shallow. Lower (short-term) highs, bounded by 41.5k-44k. Recent tight range. Realized Vols <50%, Implied Vols follow to <1year lows. Rarely see 1week IV <45%.

3) IV is low, but low does not mean cheap – IV still sits above RV. Can go lower still. Of course, RV is backward-looking. It doesn’t take much at these IVs for a sudden spot movement to make the buyer look like a genius. Spikes from lowest levels are unexpected by definition.

4) The first instinct when we see Puts being bought is bearish sentiment. The 7day maturity signals imminent move. But, it also means very cheap cost. The Fund that bought these is predominantly a Long-only fund…and a very big one. The premium spent is a fraction of 1% of AUM.

5) So while this could be a bearish bet, it is also likely protective of AUM. But why now? Perhaps they are concerned about Spot/deriv market manipulation over an illiquid weekend. Perhaps just concerned over the next week against falls <40k, but prefer to lose low-cost premium.

6) There also comes a point where the level of IV just becomes a good risk-reward bet. The macro-environment is still very lively. Macro IV has premium attached. Crypto IV is at one-year lows. The DOV inventory absorbed by MMs enabled the Fund to accumulate Puts without impact.

7) The point is that only the Fund that bought them knows for sure, publically. It’s fun to speculate and confirm one’s own bias, but Options can be used in multiple ways to fulfill objectives. When IV becomes very low the risk-reward is enhanced but is no guarantee of success.

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Tony Stewart Tony Stewart

ex-MS Head of Trading desk /BTC Vol. Prop trading /Option Market forensics/ Alter Ego account Digital Asset arena. Tweets are my opinion, not financial advice.