NDAX | Market Update August 28th: Jackson Hole Symposium & Options Market Structure
Welcome back to our Market update. This week, we delve into the insights gleaned from commentary provided by global central bankers at the Jackson Hole Symposium. We also take a deep dive into the crypto options market, analyzing factors such as realized and implied volatility, term structure, skew, and their potential impact on market trends and trading strategies.
Macro
Federal Reserve Chair Jerome Powell, addressing the annual gathering in Jackson Hole, Wyoming, reinforced the central bank’s readiness to raise interest rates until confidence solidifies in the trajectory of inflation toward the 2% target. Despite a decrease in inflation from its peak over the past year, Powell reiterated ongoing concerns about its persistence. He underscored the Fed’s commitment to a vigilant policy stance, signaling a cautious approach to rate adjustments. Despite this, the stock market concluded on a positive note, with U.S. stocks initially experiencing gains, while major cryptocurrencies finished the day with slightly negative. Powell emphasized that decisions would be meticulously weighed based on incoming data and evolving economic conditions. The Fed’s future rate direction will hinge on a comprehensive evaluation of progress and risks, as they navigate between potential further tightening or sustaining the current policy stance. This week’s macro data includes Core Personal Consumption Expenditures (PCE) which is the Fed’s key inflation metric. An uptick in Core PCE could have implications for the Fed’s rate hike path moving forward. Currently the market has priced in a 20% probability of a rate hike in the upcoming September meeting. European Central Bank (ECB) President Christine Lagarde championed a sustained strategy of heightened interest rates to achieve the bank’s 2% inflation objective. Speaking at the Jackson Hole symposium, Lagarde emphasized the necessity of maintaining restrictive interest rates over an extended duration to ensure inflation falls back in line with the ECB’s medium-term target. She further highlighted the significance of central banks embracing flexible monetary policy approaches, moving beyond dependence on obsolete models and reactionary decision-making driven solely by current data. Lagarde expounded on the ECB’s response framework, which encompasses three key determinants: the inflation outlook, the underlying dynamics of inflation, and the potency of monetary policy transmission. These remarks coincide with apprehensions about sluggish economic growth in the Eurozone, as reflected by the subdued German IFO survey signaling deteriorating business sentiment.
Crypto
BTC and ETH have maintained a relatively stable trajectory following the recent surge in volatility. While our previous report delved into the role of flow and positioning dynamics in the market sell-off, the current week reveals a resurgence in volatility selling across both BTC and ETH. Implied and realized volatility have retraced to levels reminiscent of the period before the sell-off, while the term structure remains in contango.
Realized and Implied Volatility
Following the pronounced spike that saw Bitcoin realized volatility surge from 20 to 50 points and Ethereum from 40 to 60, the past week witnessed a retreat in both assets, with implied and realized volatility settling back in the high 20s. Remarkably, during the period of volatility turmoil, implied volatility failed to escalate at the same pace as realized volatility. This return to lower levels reinforces the notion that traders have reverted to the practice of harvesting option premiums by selling volatility. A predominant topic of discussion within crypto this week has been whether the sell-off would provoke a lasting structural shift in the options market. Yet, the decline in both implied and realized volatility experienced after the sell-off suggests that such a transformation is unlikely.
Term Structure and Skew
Bitcoin’s term structure remains in contango, with the back end registering an uptick of approximately 4 vol points from the previous week. In contrast, Ethereum’s term structure no longer exhibits inversion at the front end, having shifted by just one vol point on the back end from the prior week. Skew dynamics have evolved, with BTC witnessing a rise in call dominance after puts took precedence ahead of the sell-off. Longer-dated BTC options display minimal put positioning. Ethereum has upheld its put skew in shorter-dated options, albeit not as dominantly as observed in recent weeks. Subsequent to the sell-off, traders are displaying a greater inclination towards positioning in ETH calls, particularly in longer-dated options from October onwards.
Flows and Positioning
A decrease in volumes within the spot crypto market was notable this week, a trend typically observed following a market sell-off. Gamma positioning for both BTC and ETH has undergone a transition towards shorter positions due to the influx of protection buyers during the downward movement. Short gamma among dealers could intensify upward and downward price movements, as dealers strive to maintain a balanced hedge and safeguard their PnL. While Ethereum’s dealer gamma remains largely neutral, a substantial gamma wall exists on the upside. This week’s focus on spot volumes will provide insights into potential upticks as both implied and realized volatility settle back into the sub-30 range.
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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.
