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Realized Vol Dramatically Higher

From deribit

Crypto Sells Off As Middle East Tensions Escalate

The recent Iranian attack on Israel triggered a significant sell-off in the crypto market. BTC dropped to $61k, while ETH fell even further to $2.85k. Alts also experienced notable declines of -20/30%.

The uncertainty stemming from potential military responses dominates market sentiment, leading to hesitancy on the next directional movements.

Additionally, factors such as higher-than-expected inflation in the US are contributing to the negative market environment as the Fed rate cut expectations are revised lower.

Be aware, while historical trends suggest buying opportunities during geopolitical conflicts, ongoing uncertainties may lead to continued volatility.

Realized Vol Jumps Dramatically

Geopolitical tensions resulted in a sharp increase in realized vol for both BTC and ETH. BTC’s 10- day realized vol rose to the 70s, while ETH nearly touched 100.

1-month implied vol was softer while weekly vol remained high due to gamma working so well, aside from the halving event and its vol expectations. Note that macro correlations are rising.

When it comes to ETH, its outperformance in terms of gamma with deep negative carry gives us caution is in selling gamma, while shorting vol on the upside seems more favorable in BTC or ETH.

Inversion of Term Structures

The BTC term structure shows a slight inversion, with April expiries maintaining higher levels due to increased realized volatility. Conversely, the rest of the curve shifted lower from May 24 onwards. Skew flipped aggressively due to crash risk being hedged.

Meanwhile, the ETH term structure exhibited more significant inversion compared to BTC, reflecting higher realized vol. Weekly vol surged approximately 20pts to nearly 100, while mid-curve activity indicated selling as May calls were sold off. Skew in put premium was extended to Jun 24.

Medium Term ETH/BTC Spread Looks Cheap

The ETH/BTC vol spread increased to around 10 vols in the weekly bucket as ETH’s realized vol surged, outperforming BTC by nearly 30pts.

However, the rest of the curve showed a small premium for ETH vol of around 2-3 vols. The medium- term volatility spread appears inexpensive, indicating potential opportunities for vol players.

Meanwhile, the ETH/BTC spot spread traded below support, potentially leading to further downside amid escalating war risks in the Middle East. Given the high realized spread and the upcoming halving, we presented opportunities to own ETH straddles versus BTC straddles to our subscribers.

Violent Reversal Into Put Skew

The recent spike in realized vol led to a sharp reversal into put skew in the front expiries for both BTC and ETH. Both exhibited around 10 vol put skew in the front weekly expiry as investors anticipated reactions from Israel. Skew curves steepened, with put skew in the front and call skew in the back.

While BTC effectively maintained its call skew in the backend due to long-dated call buyers, ETH’s upside skew diminished, resulting in the long-end call premium falling below BTC for the first time in a while. Spot/vol correlation suggests a potential decrease in volatility with spot recovery.

Option Flows And Dealer Gamma Positioning

BTC option volumes surged by 25% to around $9.5 billion amid increased hedging activity and liquidations. Last week saw bullish flows focusing on longer-term positions, including call spreads for June 28, 2024, and calls for December 24, 2024, and March 25, 2025.

Similar trends were observed in ETH volumes, which also increased by 25% to $625 million. Notably, a significant bearish structure involved selling 26 April 2024 3500 and 3600 calls to fund the purchase of 28 June 2024 3000/2500 put spreads.

Despite negative dealer gamma for BTC, it has not had a substantial impact, overshadowed by larger flows driven by geopolitical headlines. ETH dealer gamma weakened as spot prices declined, leading to a significant short strike at 3000.

Strategy Compass: Where Does The Opportunity Lie?

Short-dated call ratios look like the best way to play any recovery as we would expect vol to retrace lower.

Long ETH vol versus short BTC vol in the 2-3 month buckets also look sensible from a vol trading perspective.

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