OTC Desk Market Update: Gauging Market Sentiment — Term Structure and Skew in Crypto Options
Welcome back to our weekly market update! Here are the top things we’ll be paying attention to this week:
- U.S. Consumer Price Index (CPI) report on Wednesday.
- U.S. Initial Jobless Claims data on Thursday.
- Options Expiry on Friday.
Macro
Slower Job Growth in April
The U.S. economy added 175,000 nonfarm jobs in April, lower than the expected 240,000. The unemployment rate ticked up to 3.9% from 3.8%. Average hourly earnings rose 0.2% month-over-month and 3.9% year-over-year, both below estimates.
Labor Market Cooling
The jobless rate matched the highest level since January 2022. The broader underemployment rate also edged up to 7.4%, the highest since November 2021. However, the labor force participation rate was unchanged at 62.7%.
Market Reaction
The report raised prospects of a “Goldilocks” scenario where growth continues but not at a rapid pace requiring further Fed tightening. Stock futures rose and Treasury yields fell on expectations of potential rate cuts later this year.
Fed’s Inflation Battle
Despite the U.S. Federal Reserve holding rates steady, Chairman Jerome Powell noted that inflation remains “too high” with lack of progress toward the 2% target. However, the softer jobs and wage data revived expectations for rate cuts as soon as September. While inflation has cooled from last year’s peak, it remains elevated around 3% annually based on recent reports. The Fed is trying to navigate a path to lower inflation without causing a severe economic downturn.
Crypto Market Overview
Implied and Realized Volatility
Implied Volatility (IV), which is a forward-looking measure of expected market turbulence, has been trading at a premium over realized volatility, inviting more option sellers back into the market. Markets have been relatively range bound over the past week without any clear crypto-specific catalysts and a slow week of macro data. This decreases the need for hedging, which options are typically used for, resulting in lower realized volatility and higher implied volatility.
It is worth noting that when realized volatility did manage to spike briefly, implied volatility remained relatively subdued or drifted lower, flipping the carry from positive to negative for both Ethereum (ETH) and Bitcoin (BTC).
Term Structure and Skew
Term structure appeared relatively flat, especially for Ethereum. Despite slight variations within short-term contracts, the curve between May and July showed modest increases in volatility levels. Market behavior indicates traders expect a lack of aggressive movement in the near term. This contrasts with a typical steep curve scenario, which might suggest more significant future volatility.
In terms of skew — BTC and ETH have seen a noticeable shift. While Ethereum maintained a put premium, indicating protection demand against price declines, Bitcoin exhibited a shift towards call premiums, suggesting a growing expectation of price increases. This movement in skew indicates that in the short-term, speculative positioning is dominating due to a lack of near-term catalyst, but in the long-term bullish sentiment is still prevalent in the market.
Options Flows and Positioning
In the past few weeks option flows have been quite mixed, and last week continues that trend. While Bitcoin’s option volumes remained stable, Ethereum’s increased as put options were aggressively bought, indicating a heightened concern for potential downside risks. Notable strategies included calendar trades, which seemed to target specific anticipated events like Ethereum ETF approvals, aiming to capitalize on expected volatility surges. However, the impact of these trades remains uncertain as the market continues to adjust expectations around key dates.
Furthermore, gamma positioning has revealed that dealers in both Bitcoin and Ethereum markets are managing positions that could influence price dynamics if certain price levels are reached or surpassed ($65,000 and $60,000 USD for BTC and $4,500 USD for ETH). However, the size of these positions is currently not large enough and they may not have a significant market-moving impact under current conditions.
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 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.
