Elevated Implied Volatility in Crypto – What’s Next?
Welcome back to our weekly market update! Here are the top things we’ll be paying attention to this week:
●????? US: August Manufacturing PMI on Tuesday
●????? CA: BoC Interest Rate Decision on Wednesday
●????? US: Unemployment Rate on Friday
Macro Update
U.S.
?Robust Labour Market
The U.S. labor market exhibited a continued capacity for growth, as evidenced by the recent employment report. The addition of 220,000 non-farm payrolls in August surpassed the anticipated figure of 200,000, reflecting a robust labor environment. Despite this growth, the unemployment rate remained stable at 3.6%, highlighting a persistently tight job market. A closer examination of sector-specific employment reveals substantial job gains in the leisure and hospitality sectors, which added 50,000 positions, underscoring a rebound in consumer-facing industries. However, the manufacturing and construction sectors experienced only modest increases, reflecting ongoing structural challenges and economic uncertainties.
Inflationary Pressures and Federal Reserve Actions
Inflation remains a central concern for the U.S. economy, as highlighted by the Consumer Price Index (CPI) data for August. The CPI increased by 0.3% for the month, translating to an annual inflation rate of 3.2%. This uptick in prices is primarily attributed to rising costs in housing and food services. The core inflation rate, which excludes volatile food and energy prices, stabilized at 3.1%, indicating persistent underlying inflation pressures.
In response to these inflationary concerns, the Federal Reserve has signaled the possibility of an interest rate hike in its upcoming meeting. Market expectations are leaning towards a 25-basis point increase, aimed at tempering inflation while balancing economic growth. This potential rate hike reflects the Fed's ongoing challenge of managing inflation without stifling economic momentum.
Canada
Jobs and Wages Continue to Grow
Canada’s labor market showed moderate growth, with the addition of 15,000 jobs in August falling short of the expected 20,000. The unemployment rate decreased slightly to 5.2%, indicating a strong labor market despite the slower pace of job creation. Sectoral job growth was notable in the service sector, particularly in health care and education, which contributed to the overall increase. However, the manufacturing sector faced a slight decline in employment, reflecting ongoing challenges in this area.
Wage growth in Canada moderated to 3.6% year-over-year, which is lower than the wage growth observed in the U.S. Nonetheless, this increase still indicates upward pressure on wages, driven by a tight labor market and rising costs of living.
Inflationary Pressure Under Control
Canada's inflation landscape reflects moderate pressures, with the Consumer Price Index rising by 0.2% in August, leading to an annual inflation rate of 2.8%. This increase was driven largely by higher costs in transportation and housing. The core inflation rate, excluding volatile items, remained stable at 2.6%, suggesting that inflationary pressures are under control but warrant continued vigilance.
?
Crypto Market Overview
Over the past week, both Bitcoin and Ethereum have exhibited increased volatility, with implied volatility surpassing realized volatility in both cases. The term structures for both cryptocurrencies reflect short-term risks outweighing long-term concerns, while volatility skews indicate a higher demand for downside protection. Options flows and positioning further underscore a cautious and bearish sentiment among traders, highlighting concerns over potential future declines in both Bitcoin and Ethereum prices. As always, monitoring these metrics closely will be crucial for understanding sentiment and making informed decisions.
Implied and Realized Volatility
Over the past week, Bitcoin (BTC) has exhibited significant fluctuations in implied volatility (IV), which reflects market expectations of future price movements. At the beginning of the week, BTC's IV was around 45%, indicating moderate uncertainty among traders. However, as volatility spiked mid-week due to a sharp drop in BTC prices, IV surged to approximately 55%. This increase suggests heightened market anxiety and anticipation of further price swings. By the end of the week, implied volatility settled around 50%, reflecting a balance between market concerns and a slight reduction in anticipated price swings.
Ethereum (ETH) experienced a similar trend in implied volatility. At the start of the week, ETH's IV was pegged at 50%, mirroring a moderate level of market apprehension. As Ethereum's price faced a downturn, IV jumped to 60%, reflecting increased uncertainty and a higher premium for hedging against potential price movements. By the week's conclusion, IV had moderated to around 55%, indicating that while market concern remained elevated, the intensity of anticipated price swings had slightly lessened.
领英推荐
Term Structure and Skew
The term structure of Bitcoin options has displayed a backwardation over the past week. This means that shorter-dated options have exhibited higher implied volatility compared to longer-dated options. At the beginning of the week, the 1-month BTC options had an IV of 52%, whereas the 6-month options were priced at 48%. This backwardation indicates a market perception of higher short-term risk compared to long-term risk, potentially due to recent short-term price shocks or upcoming market events.
Ethereum's options market has also been experiencing backwardation. Shorter-dated ETH options had an IV of 57% at the start of the week, while longer-dated options were priced at 53%. This pattern signifies an expectation of more immediate risk compared to the long-term outlook. The shift towards higher short-term volatility is indicative of market apprehension over recent price actions and uncertainty about immediate future movements.
Bitcoin’s volatility skew, which measures the difference in implied volatility between out-of-the-money (OTM) puts and calls, has shown an upward shift. This skew has increased from 5% to 8% over the week, suggesting a greater demand for downside protection. Traders are paying a premium for OTM puts, reflecting a heightened concern for potential downward price movements. Ethereum's volatility skew has been less pronounced compared to Bitcoin but still notable. The skew increased from 6% to 7% over the week, highlighting a moderate rise in the demand for downside protection. The increased skew suggests that while there is a heightened concern for downside risk, the overall market sentiment remains relatively balanced compared to Bitcoin.
Option Flows and Positioning
BTC
Options Flows
Bitcoin options flows have indicated a strong preference for protective puts. There has been a noticeable increase in the volume of OTM put options, especially as BTC experienced sharp declines mid-week. This uptick in put volume suggests that traders are actively seeking to hedge against further downside risk. Conversely, call option volumes have remained relatively stable, indicating less enthusiasm for bullish positions.
Positioning
The overall positioning in Bitcoin options reflects a cautious market stance. The open interest in put options has surged, while call option open interest has seen minimal change. This positioning highlights a bearish sentiment among traders, with a focus on protecting portfolios against potential further declines in BTC prices.
ETH
Options Flows
In Ethereum’s options market, there has been a similar trend with increased activity in OTM puts. The volume of puts surged as Ethereum's price experienced volatility, reflecting a heightened demand for downside protection. Call options, while still active, have seen less volume compared to puts, indicating a more defensive approach by traders.
?Positioning
Ethereum options positioning has shown a shift towards bearish sentiment. The increase in open interest for put options, coupled with stable call open interest, underscores a market that is leaning towards hedging against potential downside rather than betting on upward price movements. This positioning suggests that traders are bracing for continued volatility and potential negative price action.
As always, our team is here to assist you and provide services tailored to your specific needs. If you would like to discuss these topics further, we invite you to book a meeting with our team. To schedule a meeting, please visit NDAX OTC | Bitcoin and Crypto OTC Trading Desk or contact your OTC representative directly. We look forward to assisting you on your investment journey.
Don’t forget to follow us on social media for more updates and join the conversation on our forums.
Disclaimer: This newsletter is for informational purposes only and does not constitute investment advice or an offer to sell or a solicitation of an offer to buy any securities or other financial instruments. The information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of the available data. Past performance is not a guarantee nor a reliable indicator of future results. Please consult your financial advisor before making any investment decisions