NDAX | OTC Desk Market Update: Navigating Volatility Ahead of Quarterly Options Expiry — Sept. 25th
Welcome back! Here are the top things that we will be paying attention to this week:
- September 29th Quarterly Options Expiry
- U.S. Core PCE on Friday
Macro
Jerome Powell, alongside the Federal Reserve, has been consistently emphasizing a “higher for longer” approach to prepare the financial markets for an extended period of elevated interest rates. Powell reiterated this stance in the recent post-FOMC press conference last week, holding firm to the Fed’s position. Until recently, the Fed Funds futures market did not align with the Fed’s “higher-for-longer” narrative. However, the Federal Reserve’s unwavering messaging, a re acceleration of inflation, and robust economic expansion have prompted a reassessment in the market’s outlook, with bond yields rising across the curve in response to Powell’s press conference.
U.S. stock futures experienced an uptick in Sunday evening trading, a welcome shift following a challenging week for key benchmark indices. Investors had been cautious in response to the ascent of long-term bond yields, driven by the assertive stance taken by Federal Reserve policymakers in their recent statements post FOMC. The next Fed meeting is scheduled for November 1st with markets pricing in a 25% probability of a rate hike, down from 50% a week ago.
In the upcoming week, investors will be diligently tracking a range of economic indicators and events. These include data related to building permits, consumer confidence, new home sales, durable goods orders, Q2 GDP figures, pending home sales, and the Personal Consumption Expenditures (PCE) price index. Additionally, markets will be paying close attention to speeches from prominent Federal Reserve officials Kashkari, Bowman, Powell, Cook, and Williams.
Crypto
Crypto rallied into the FOMC meeting only to give back most of those gains the day after. Bitcoin (BTC) remains above the $26,000 USD level with Ethereum (ETH) failing to maintain the $1,600 USD level and falling below that for the first time since the sell off in mid-August. The cryptocurrency market is no stranger to extreme price swings, and deciphering the underlying factors that contribute to these fluctuations is of paramount importance to traders and investors alike. Below we dissect the recent developments in BTC and ETH, with a keen focus on the ever-shifting landscape of volatility.
Realized and Implied Volatility
Understanding the relationship between implied and realized volatility and how they influence the trading decisions of market participants is crucial for understanding modern markets. As a quick refresher — implied volatility (IV) is a forward-looking measure of market expectations regarding future price fluctuations. Realized volatility (RV), also known as historical volatility, is a backward-looking measure that quantifies the actual price fluctuations that have occurred in the past.
Realized volatility in BTC and ETH declined in the period leading up to the FOMC meeting, dropping to the low 30s. However, shortly after the meeting, there was a brief spike in volatility, coinciding with a corresponding decline in prices. It’s worth noting that higher realized volatility typically correlates with lower price movements, although the opposite scenario can occur if call options dominate option flows relative to puts. This situation can lead to an increase in spot prices alongside rising volatility.
Following the spike in realized volatility, there was a rapid return to previous levels as the weekend approached. This allowed Bitcoin to maintain its position above the $26,000 level. In contrast, Ethereum struggled to stay above the $1,600 level during this period.
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Implied volatility in both BTC and ETH followed a similar trajectory as realized volatility, beginning the week in the mid-thirties and remaining relatively stable leading up to the FOMC meeting. The day following the meeting, ETH implied volatility surged into the 40s, while BTC remained steady. Nonetheless, this spike proved short-lived, as ETH’s implied volatility had descended to the high 20s by week’s end.
Bitcoin implied volatility continues to trade at a premium to Ethereum implied volatility by about 4 vol points, reflecting trader sentiment around catalysts like the potential approval of Bitcoin spot ETFs and the halving in 2024. In the absence of immediate catalysts specific to ETH, the market will likely continue to price ETH volatility at a discount. Nevertheless, this situation presents an opportunity for traders willing to hold ETH options in anticipation of future volatility, as the lower implied volatility renders ETH options cheaper in volatility terms compared to BTC options.
Term Structure and Skew
BTC term structure remains in contango, with the front of the curve shifting lower about two vol points from a week ago. ETH term structure is similar, however October implied vol is trading lower than September, creating a depression in the curve. Without any near-term industry-specific catalysts, ETH being priced a discount in volatility looking forward should not be too surprising.
What’s even more remarkable is that when we analyze the behavior of implied volatility before and after the FOMC meeting, we find that crypto’s responsiveness to macroeconomic events is significantly less pronounced compared to their responsiveness to announcements regarding a potential spot ETF approval. This difference in sensitivity is also evident in price movements surrounding these two types of events.
Skew, which measures the relative demand for call and put options, remains a story about the September 29th expiry in both BTC and ETH with the majority of put skew concentrated in that expiry. The September 29th expiry this week coincides with the quarterly options expiry in U.S. equities, making it an important date on the calendar. Historically, entering an expiry with elevated put skew can feed back into spot prices as a function of the positioning in the options market. If price begins to fall below the $25,000 USD strike in BTC and the $1,500 USD strike in ETH, the steepness of put skew will increase the implied volatility for both assets and continue to accelerate as price falls further.
The same is true above the $27,000 USD strike in BTC and $1,700 USD strike in ETH as the steepness of call skew can create a similar dynamic to the upside. BTC skew at other expiries is more call dominant whereas ETH skew is more neutral with almost equal put call exposure.
Flows and Positioning
Much like the previous week, market flows in both Bitcoin and Ethereum were characterized by significant put protection buying, particularly focusing on September and December expiries. Notably, there was a substantial buying of December $20,000 USD strike puts in Bitcoin, along with the acquisition of $1,400 USD strike puts in Ethereum. These actions contributed to the steep skew we discussed earlier, as these options are considered out of the money and are more sensitive to volatility.
Bitcoin and Ethereum are showing divergent gamma positioning with Bitcoin’s positioning being choppy, with short and long positions shifting as market conditions evolve, leaving the gamma profile of Bitcoin slightly neutral. In contrast, Ethereum has pronounced long gamma positioning, particularly in the $1,650–1,700 USD strike range. This type of positioning in ETH can have the effect of creating resistance at those ranges, as market makers that are long gamma will be selling into any rallies that reach those levels.
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.
Disclaimer: This article is not intended to provide investment, legal, accounting, tax or any other advice and should not be relied on in that or any other regard. The information contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of cryptocurrencies or otherwise.