OTC Desk — Monday Market Report | November 6th to 12th
Welcome back! Here are the top things that we will be paying attention to this week:
- Weekly Options Expiry for Crypto and U.S. Equities
- U.S. CPI data on Tuesday
- U.S. PPI data on Wednesday
Macro Overview
After a slow week in terms of data, our focus shifts to the U.S. Consumer Price Index (CPI) report on Tuesday, marking the next significant data release. Federal Reserve Chairman Powell addressed the public twice last week, reiterating the Fed’s commitment to a data-dependent approach in managing inflation. He emphasized that the Fed will act in accordance with their 2% target.
Market participants had started speculating that the Fed had concluded its hiking cycle after two consecutive Federal Open Market Committee (FOMC) meetings where rates remained unchanged. However, Chairman Powell clarified that, despite the pause, there is no consideration of a rate cut. Additionally, he pointed out that due to increased fiscal spending, monetary policy might not be as tight as necessary.
Over the past two months, we’ve witnessed reaccelerations in both CPI and the Personal Consumption Expenditures (PCE), making Tuesday’s release even more crucial.
Crypto Market Overview
ALT SZN Returns: Solana (SOL) surged by 20% on Friday, signaling the conclusion of a week in which the previously maligned altcoin market recaptured its bullish 2021 performance. Ethereum outpaced Bitcoin, and some meme coins delivered returns exceeding 100% almost daily. Despite the prevailing focus on Bitcoin throughout the year due to the imminent halving and potential spot ETF approval, the recent strong returns in altcoins suggest a renewed and growing interest in the crypto market.
领英推荐
Realized and Implied Volatility
Realized Volatility (RV) for both Bitcoin (BTC) and Ethereum (ETH) primarily stayed in the low 30s throughout most of last week. However, as we approached Friday’s option expiry and observed that prices for both assets were at levels with high concentrations of negative gamma, we witnessed one of the stronger rallies of the year, with Solana rallying almost 20% in a single day. The 7-day realized volatility for ETH reached the mid-50s, while the same metric for BTC reached the 40s and has maintained that level as we enter the new week.
The spread between ETH and BTC Implied Volatility (IV) turned positive this week. IV in ETH is now trading at a premium to BTC, indicating increased trader activity in ETH. The sentiment shift we discussed last week played out in price action, with ETH outperforming BTC. Additionally, with news circulating about a potential U.S-listed ETH spot ETF, interest in ETH is on the rise.
Term Structure and Skew
Bitcoin’s term structure is in contango and has shifted lower in the front-end by about 5 vols, and approximately 2 vols in the back-end of the curve. Additionally, the back-end of the curve begins to flatten after the March 29, 2024 expiry. Historically, a flattened curve suggests that traders are not expecting significant changes in market volatility in the long term or that traders have shown a preference to be exposed to near-term options, bidding IV to a similar level as longer dated options.
Reflecting its recent outperformance over Bitcoin, Ethereum’s term structure is slightly higher than a week ago, another example of how sentiment has shifted towards ETH and other alts. Like BTC, ETH’s term structure is in contango, however the December 29th options are trading at lower volatility than the November 17th options creating a dip in the curve.
Front month put-skew in BTC is elevated with the December 29th options showing the largest difference between puts and calls. Front-end call skew in Ethereum reached the highest level seen all year, reinforcing the shift in sentiment we’ve been speaking about.
Options Flows and Gamma Positioning
Bitcoin saw a decline in volumes from the previous week, but traders continued to roll their call positions into higher strike prices. This was particularly noticeable in the December 2023 and January 2024 expiries. Ethereum volumes dropped 40%, with call overwriters covering shorts as well as fresh call buying from traders looking to get long ETH as news of a potential U.S.-listed Ethereum spot ETF began circulating on social media. These took place primarily in shorter-dated November expiries, which have higher gamma sensitivity and will profit from a potential breakout.
Bitcoin’s gamma positioning remains negative, albeit not as extreme as it has been recently. Nevertheless, there is a noteworthy gamma buildup at the $40,000 USD strike, making it a crucial level to monitor. Market makers are net short calls, but the decline in realized volatility has enticed some gamma sellers back into the market, aiming to capitalize on the positive spread between implied volatility (IV) and realized volatility (RV).
Ethereum’s gamma turned negative last week for the first time in weeks. Market makers (MM’s) were short gamma after selling short-dated calls at the $1,900 USD strike. As the price surpassed that level, MM’s found themselves having to hedge their exposure by acquiring ETH futures to offset their option sales. Presently, a similar scenario is unfolding at the $2,000 USD strike, warranting our close attention. Historically, an increase in short gamma has been known to drive realized volatility higher.
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.