2/ Bearish sentiment spilled into the week across macro markets with equities selling off hard on Monday as US opened.
3/ BTC and ETH tumbled in suit, breaking below 40,000 and 3,000 respectively. However, there was no follow through on the downside and spot quickly bounced back above.
4/ On the back of strong support, we saw a flurry of option activity:
1. A counterparty who had been buying huge amounts of downside risk reversals (buy put / sell call) started taking profit on the position (sell put / buy call).
5/ Since December, they had been buying BTC March 40,000 puts against selling 80,000-100,000 calls and buying ETH March 3,000 puts against selling 8,000-10,000 calls.
6/ 2. Large call buying mostly in BTC January 44,000-48,000 strikes.
This had a significant impact on risk reversal levels with a sharp normalising of the put skew. BTC moved from -8% to -1% and ETH from -12% to -2%.
7/ Vol levels were also elevated as spot prices moved higher into the US CPI print released earlier today.
8/ CPI numbers came in largely in line with expectations at 7% year-on-year. Crypto markets rallied on the back of this with BTC trading around 44,000 and ETH trading around 3,400.
9/ While crypto twitter has been screaming for a short squeeze on this bounce, the vol markets are suggesting otherwise. Post-CPI, front-end vols collapsed to weekend levels (BTC from 70% to 60% below)
10/ In a similar fashion, this was reflected in ETH ATM Implied Volatility vs. Spot as well (85% to 70%)
11/ On our books, we've been able to realise long gamma (short-tenor options) decently well, trading the sharp spot ranges across the board. We've taken profit on the long gamma and maintain our long vega position across the board.
12/ Two observations/takeaways from an eventful few days of trading:
1. The crypto option market has reached a critical size where it is starting to have material impact on spot markets.
13/ For instance, one key reason for the lack of follow through in BTC and ETH below 40,000 and 3,000 is possibly the few large players owning strikes around those levels.
14/ They naturally create support as they bid for spot to trade the delta there. And when they take take profit on those option positions, the upside impact on the market is very clear as well.
15/ Additionally, a sharp options player who had bought 42,000 January calls started taking profit on those around the 44,000 spot level, naturally creating some resistance there.
16/ We think option activity will increasingly dictate spot movements as the option market continues to grow. It might be worth keeping a close eye on this market (if you aren't already doing so).
17/
2. We are increasingly convinced that there is structural downside pressure on vols.
18/ We have been long gamma and long vega expecting a much larger rally in vols given the macro uncertainty and choppy price action. Not only was there no convincing rally in vols, but the front-end has collapsed even as spot threatens to break the topside.
19/ We remain long vega but would be keen to flip short if vols continue to underperform.
And that’s a wrap for today’s market update! 👋 Do join us on Telegram, and stay tuned for more updates like these! ✨
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2/ Once again, views from our 2021 year-end piece came earlier than expected as equity and crypto markets tumbled on the back of Fed minutes released on Wednesday, 5 January.
3/ From our 2021 piece (docsend.com/view/g7nx3g54t…): "...inflation risk... will compel them (the Fed) and other global central banks to tighten faster, harder and most importantly with resolve."
2/ Two of our key views from our 2021 year-end research piece (docsend.com/view/g7nx3g54t…) have come into play a lot quicker than expected:
1. Significant softening of vols 2. Outperformance of 'laggard' layer 1s
3/ The hard dip in vols, especially in ETH, has been truly surprising. 1-month vols in ETH have collapsed to 60+%, a stunning drop from over 95% just two weeks ago!
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Now, on to the thread! 🧵
2/ While spot prices have been trading in a relatively tight range (before the dip today), vols have been telling an interesting story.
3/ Thursday, 23 December, right after we posted our last market update, we saw a mini short-squeeze with BTC crossing above 50,000 and ETH crossing above 4,000.
Vols spiked up 4% on the back of this. A great opportunity to short vols.
1/ If anyone had any doubt that the crypto market is becoming institutional, our option desk traded over $2 billion in options just this week. 🧵
2/The flows have mostly been decent two-way in BTC and ETH but we’ve also seen notable OTC flows in ALGO and LUNA (no surprise as liquidity is streaming out of the two largest Altcoin Defi Option Vaults).
3/ In the past week, panic and nervousness have been leaving the market with vols generally easing (Chart) and BTC risk reversals turning up from -7% to -2% before settling around -5% as we head into FOMC (Chart).
1/ The violent sell-off on Saturday saw BTC trade to 42,333 lows, a hefty 39% drawdown from 69,000 highs. 🧵👇
2/ The result of weekend illiquidity against a risk-off overhang from Omicron fears, inflation concerns, the possibility of an accelerated taper and also weakness in the Chinese stock market.
3/ The China factor stands out for us as funding rates on Chinese-dominated exchanges like Huobi, OKEX and BYBIT continue to be very negative in spite of the bounce in spot off the lows.