Volatility Weekly

Volatility Update, 8/11/23

BitOoda Crypto Market Report, 8/11/23

Michael Tauckus

Key Takeaway #1

Key Takeaway #2

Key Takeaway #3

Key Takeaway #4

It’s beginning to look a lot like…August. It seems even the usually volatile crypto markets are not immune to the seasonally slow summer months. In the middle of the dog days of summer, both majors are struggling to gain momentum in either direction, and this lack of volatility continues to be reflected in the options market. The inability to hold major technical levels to the upside has led to rangebound trading and a 6 year low in realized volatility. One potential catalyst was removed from the market this morning when the SEC announced it would delay a decision on approving or disapproving ARK Investment’s Bitcoin ETF application.

With Realized Volatility trading in the low 20s, Implied Volatility has followed suit and continues to trend lower. As the front end, the term structure has lost so much juice, it seems programmatic selling has turned its focus toward longer dated options, particularly in ETH, moving the curve lower in parallel this week. This weakness in the back end of ETH presents some historically cheap opportunities to begin accumulating long options. We will outline two potential trades in this report. Both trades involve zero initial outlay of premium and possess great risk/reward profiles.

Keeping an eye on the DEC/JUN $40,000 call calendar recommendation from last month: despite the selloff in futures and a loss on the positive delta, the December IV has fallen more than June over the period. When entering the trade, both strikes were trading ~57%. The June calls now trade at a premium of 4.5%. (46% vs 50.5%). Current profit on the trade is ~10%. The long vega component on this structure should accelerate profits if the market can rally to new highs in the next quarter. We continue to recommend adding to the trade at this level for a nice upside play ahead of next April’s halving.

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It’s beginning to look a lot like…August. It seems even the usually volatile crypto markets are not immune to the seasonally slow summer months. In the middle of the dog days of summer, both majors are struggling to gain momentum in either direction, and this lack of volatility continues to be reflected in the options market. The inability to hold major technical levels to the upside has led to rangebound trading and a 6 year low in realized volatility. One potential catalyst was removed from the market this morning when the SEC announced it would delay a decision on approving or disapproving ARK Investment’s Bitcoin ETF application.

With Realized Volatility trading in the low 20s, Implied Volatility has followed suit and continues to trend lower. As the front end, the term structure has lost so much juice, it seems programmatic selling has turned its focus toward longer dated options, particularly in ETH, moving the curve lower in parallel this week. This weakness in the back end of ETH presents some historically cheap opportunities to begin accumulating long options. We will outline two potential trades in this report. Both trades involve zero initial outlay of premium and possess great risk/reward profiles.

Keeping an eye on the DEC/JUN $40,000 call calendar recommendation from last month: despite the selloff in futures and a loss on the positive delta, the December IV has fallen more than June over the period. When entering the trade, both strikes were trading ~57%. The June calls now trade at a premium of 4.5%. (46% vs 50.5%). Current profit on the trade is ~10%. The long vega component on this structure should accelerate profits if the market can rally to new highs in the next quarter. We continue to recommend adding to the trade at this level for a nice upside play ahead of next April’s halving.

**Figures:** Underlying and volatility prices
**Sources:** Deribit, Paradigm, Coingecko

ATM IV Term Structure

With Realized Volatility trading in the low 20s, Implied Volatility continued to move lower this week, with the back end softening as well.
As we have previously noted, ETH IV historically trades at a premium to BTC. For the past month, BTC IV has remained above ETH. The spread widened further this week, with ETH pressured by back month call selling.
Both curves moved down in parallel as sellers turn to the back end of the curve, with front end trending towards 25%.

**Figure:** Implied Volatility Term Structure for BTC & ETH
**Source:** Deribit, BitOoda

At-the-Money Spot Month Daily Implied Volatility

Implied Volatility in BTC front month declined slightly week on week after a brief uptick midweek.
ETH front end IV continues to make new historic lows approaching 25%. Daily breakevens are approaching $25, a new low for the contract.

**Figure:** ATM Implied Vol by Day
**Source:** Deribit, BitOoda

Front Month IV Curves

2 Week BTC 25 delta puts priced flat to ATM, with 25 delta calls priced 4.5 vols over ATM.
2 Week ETH 25 delta puts priced 1.25 vols over ATM, with 25 delta calls priced 2.0 vols over ATM.
Skew in ETH has flattened after favoring the puts last week.
BTC puts have firmed slightly on the week; however, call premium remains and has steepened 2 vols WoW.

**Figure:** ATM Implied Vol Curve 8/25 Exp
**Source:** Deribit, BitOoda

BTC & ETH 25 Delta Skew (30 day)

After a pronounced run up in call skew following the XRP ruling in mid July, ETH skew had reverted and traded to a significant put premium last week. Calls have rallied this week, leading to flat skew pricing.
BTC Skew remains toward the calls after dropping to flat 2 weeks ago.

**Figure:** BTC & ETH 30 day 25D Skew
**Source:** Glassnode, BitOoda

ETH 1x2 Call Spread Expiring March 2024

Implied Volatility continues to trade lower at an increasing rate. With steep contango in the curve, we’re beginning to see programmatic selling turn to longer dated options.
With At-the-Money IV trading below 38% in the March 2024 contact, we believe it’s a good time to begin accumulating some options at these levels.
Selling the $2100/$2500 1 by 2 call spread is a great upside play with an excellent risk/reward profile. At current levels, one can enter the trade at collecting a slight credit. The downside is limited to $390 with upside unlimited with no premium outlay.
Should the market rally with conviction, we anticipate a significant rise in Implied Volatility, which would increase profits substantially. When ETH last traded $2500, 6 month IV was more than double current levels – around 80%.

**Figure:** March ‘24 ETH $2100/$2500 1x2 CS P & L Graph
**Source:** CME, BitOoda

ETH 1x2 Iron Butterfly Expiring March, 2024

An alternative premium flat strategy is selling a 1 by 2 Iron Butterfly in March. This strategy involves selling one $1900 Straddle and buying two $1600/$2200 Strangles.
Similar to the call spread ratio, there is zero outlay of premium. Losses are limited to $300 with unlimited gains in either direction.
Initially a long vega trade, this structure will lose vega over time in a range bound market.
If Implied Volatility increases, the gains are exponentially greater.

**Figure:** March ‘24 ETH $1600/$1900/$2200 1x2 Iron Fly P & L Graph
**Source:** CME, BitOoda

Notable Headlines

Ark 21Shares Bitcoin ETF Application Decision Pushed by SEC (Link)

Bitcoin low volatility, muted interest points to major move (Link)

Ethereum gas fees? Charge it, please! Visa proposes to let you pay with card (Link)

California commission outlines campaign disclosure requirements for crypto (Link)

Bittrex to Pay $24 Million Penalty to Settle SEC Crypto Case (Link)

The SEC is vying for a Ripple appeal. Here’s what to watch out for (Link)

‘Plain vanilla’ PayPal stablecoin betting on user base (Link)

Bitcoin ‘Holds Precariously’ as Cryptos Slip (Link)

FTX founder Sam Bankman-Fried returns to New York as prosecutors push for his incarceration (Link)

Coinbase Ventures' Strategic Investment Sends Rocket Pool Token Surging (Link)

Long-Term Bitcoin Holder Metric Hits New All-Time High (Link)

Appendix: Glossary of Key Terms

Implied Volatility - represents the market's expectation of future price fluctuations and is a key metric employed to price options contracts.

Realized Volatility - also known as historical volatility, this measures past market changes and their actual results.

Delta - a measure of the change in value of an option given a change in the underlying futures contract.

Vega - a measure of an option's price sensitivity to changes in implied volatility.

Gamma - a measure of the rate of change in delta given a change in the underlying futures contract.

Theta - a measure of the rate of decline in the value of an option over time.

Rho - the amount a theoretical option’s price will change for a corresponding one percentage-point change in the interest rate used to price the option contract.

Implied Volatility Curve - a U-shaped graphical representation of the pattern created by the implied volatilities of multiple options contracts with the same expiration date.

Term structure of Volatility Curve - the curve depicting the differing implied volatilities of options with the same strike price but different maturities.

Break-even - the amount of underlying movement the trader needs to capture in hedged P&L via gamma to offset daily theta.

Support and Resistance - key price levels in technical analysis that indicate the levels at which buying or selling pressure is likely to be strong enough to prevent the price from moving below or beyond that level.

Paper - institutional player or producer, a non market-maker.

Call - an option that gives the buyer the right, but not the obligation, to buy the underlying asset at the strike price any time before it expires.

Put - an option that gives the buyer the right, but not the obligation, to sell the underlying asset at the strike price any time before it expires.

Roll - to simultaneously close one option position and open another with the same commodity but a different strike price and/or expiration month.

Straddle - an options trading strategy that involves buying both a call option and a put option at the same strike price and expiration date.

Strangle - an options trading strategy that involves buying both a call option and a put option at different strike prices but with the same expiration date.

Put Spread - an options trading strategy that involves buying a put option at a specific strike price and selling another put option at a lower strike price, both with the same expiration date.

Call Spread - an options trading strategy that involves buying a call option at a specific strike price and selling another call option at a higher strike price, both with the same expiration date.

Iron Condor - an options trading strategy that involves simultaneously buying equidistant out-of-the-money call spreads and put spreads.

Call/Put Calendar - an options trading strategy that involves buying an option at a specific strike and selling an option at the same strike across different expirations.

Butterfly - an options trading strategy that involves buying one low strike and one high strike option and selling two middle strike options.

Iron Fly - an options trading strategy that involves buying and selling three options at the same expiration date and strike price. The strategy consists of buying one call option and one put option at the middle strike price, and selling two options at different strike prices that are equidistant from the middle strike price.

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Analyst Certification

Michael Tauckus, the research analyst denoted by an “AC” on the cover of this report, hereby certifies that all of the views expressed in this report accurately reflect his personal views, which have not been influenced by considerations of the firm’s business or client relationships.

Conflicts of Interest

This research contains the views, opinions, and recommendations of BitOoda. This report is intended for research and educational purposes only. We are not compensated in any way based upon any specific view or recommendation.

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It’s beginning to look a lot like…August. It seems even the usually volatile crypto markets are not immune to the seasonally slow summer months. In the middle of the dog days of summer, both majors are struggling to gain momentum in either direction, and this lack of volatility continues to be reflected in the options market. The inability to hold major technical levels to the upside has led to rangebound trading and a 6 year low in realized volatility. One potential catalyst was removed from the market this morning when the SEC announced it would delay a decision on approving or disapproving ARK Investment’s Bitcoin ETF application.

With Realized Volatility trading in the low 20s, Implied Volatility has followed suit and continues to trend lower. As the front end, the term structure has lost so much juice, it seems programmatic selling has turned its focus toward longer dated options, particularly in ETH, moving the curve lower in parallel this week. This weakness in the back end of ETH presents some historically cheap opportunities to begin accumulating long options. We will outline two potential trades in this report. Both trades involve zero initial outlay of premium and possess great risk/reward profiles.

Keeping an eye on the DEC/JUN $40,000 call calendar recommendation from last month: despite the selloff in futures and a loss on the positive delta, the December IV has fallen more than June over the period. When entering the trade, both strikes were trading ~57%. The June calls now trade at a premium of 4.5%. (46% vs 50.5%). Current profit on the trade is ~10%. The long vega component on this structure should accelerate profits if the market can rally to new highs in the next quarter. We continue to recommend adding to the trade at this level for a nice upside play ahead of next April’s halving.