OTC Desk Market Update: Bitcoin ETF Buzz and Option Positioning
Welcome back to our weekly market update! Crypto markets have started off the year with volatility taking centre stage as we await the SEC’s decision on a spot Bitcoin ETF as well as the halving in April. Here are the top things we’ll be paying attention to this week:
- Initial Jobless claims on Thursday
- CPI on Thursday
- SEC ETF Announcement
Macro
Consensus among analysts indicates a higher likelihood of a soft landing for both the US and global economies based on key economic data. The December ISM Manufacturing report revealed promising three-month highs in headline employment PMIs, albeit with a decrease in prices PMI. Contrary to bearish sentiments, historical trends suggest that cyclical lows in this indicator typically precede positive market conditions, with the S&P 500 showing a median one-year forward return of +28% in a five-cycle sample.
U.S. payrolls increased by 216,000 in December, which beat consensus expectations. The December jobs report serves as a pivotal macro event affirming the robustness of the US economy, aligning with anticipated trends. Despite an initial surge in yields after the average hourly earnings beat, bonds stopped selling-off as we approached the close.
Rate hike expectations for March continue to suggest the market is anticipating a rate cut at the March meeting with a probability of 60%, down from about 75% last month.
Crypto Market Overview
Implied and Realized Volatility
Over the last few weeks, BTC realized volatility hovered around 40 Vol, showing stability. In contrast, ETH showed slightly higher realized volatility, maintaining around 50. As of right now both are in the low 50s with BTC realizing higher than ETH for the first time in months.
This surge in volatility, both realized and implied, is directly linked to the anticipation surrounding the ETF and associated event risks. The resulting scenario has led to a notably positive carry environment (implied vol higher than realized vol). Historically, such high levels of implied-realized differential are unsustainable and often precede a reversion.
Term Structure and Skew
BTC term structure witnessed an inversion or backwardation in the front expiry (front weekly at 70+ Vol) due to the impending event risk, potentially indicating a decline in the long end (62 Vol). This suggests caution in holding excessive Vega in the back end of the curve.
ETH, while not inverted, displayed a flattening term structure around 67–68 Vol, particularly highlighting the significant bid in the back end. This trend might persist for a longer duration than Bitcoin, possibly resulting in a widened spread compared to historical averages.
BTC call skew swiftly returned, showcasing a preference for call premiums, while Ethereum maintained a call premium despite lesser spot movements. However, the current skew levels are notably lower than the peaks observed in November, indicating a more balanced approach in option positioning.
Option Flows and Gamma Positioning
Option players are favoring call spreads near the money and are cautious in reaching excessively for upside potential, implying that the rally might be nearing its peak. Ethereum’s long-dated call bid is likely to persist until a definitive repricing occurs.
Flows in BTC and ETH options ahead of the announcement show a mix of strategies, including spread trades, calendar adjustments, and selective buying/selling of options to balance risk and exposure. Majority of participants are firmly positioned in long calls in BTC and ETH.
Gamma positioning indicates a shift from a significantly short gamma to a more neutral stance in BTC, potentially mitigating explosive price actions. ETH, on the other hand, maintains a relatively negative gamma positioning for the week. Overall, market participants are positioned for the BTC ETF approval to happen before the end of the month.
As always, our team is here to assist you and provide services tailored to your specific needs. If you would like to discuss these topics further, we invite you to book a meeting with our team. To schedule a meeting, please visit NDAX OTC | Bitcoin and Crypto OTC Trading Desk or contact your OTC representative directly. We look forward to assisting you on your investment journey.
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Disclaimer:
This newsletter is for informational purposes only and does not constitute investment advice or an offer to sell or a solicitation of an offer to buy any securities or other financial instruments. The information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of the available data. Past performance is not a guarantee nor a reliable indicator of future results. Please consult your financial advisor before making any investment decisions.
