Thread by @skewdotcom

1/ BTC halving via the options market: priced-in?

The debate is heating up every day regarding whether the next halving - expected in May 2020 - is already priced in or not, with the discussion centered around the stock-to-flow model and the (in)efficiency of the BTC market.

2/ There have been voices claiming that whether or not the halving is already priced in, we should expect some volatility in the spot price around the upcoming halving date as the market adjusts to the sharp decrease is the natural supply from miners.

3/ A useful proxy to identify what the market actually thinks about the future volatility of an asset is to look at the asset's implied volatility term structure via the options market.

4/ Indeed, before an event (such as a company's quarterly earnings report or a central bank announcement), the implied volatility term structure usually exhibits a "kink" for the expiry corresponding to that event.

5/ Using forward variance, one can even calculate fairly precisely the implied move on the day of the event, based on a number of assumptions. This means traders can trade the event's "implied move" by using option calendar spreads.

6/ The BTC options market tells us an interesting story: there is no kink in the implied volatility term structure for the relevant expiry (Jun20). This means the options market does NOT anticipate any increased volatility around that time!

7/ The kink appearing in the above chart actually corresponds to the Mar20 expiry, meaning that the options market anticipate heightened relative volatility in the month of March 2020, as opposed to Q2 2020 🤔.

8/ This does not make sense in the context of alleged increased volatility expectations for the halving itself: one would expect to see a higher forward volatility for Q2 2020 vs the rest of the forward vol curve if the options market actually anticipated turmoil for this event.

9/ What does this tell us?

Either

➡️ the BTC options market believes the halving is already priced in

or...

➡️ the BTC options market is itself very inefficient!

10/ To know more about the Efficient Market Hypothesis, @nic__carter recently wrote a great article on the topic:

➡️ medium.com/@nic__carter/a…