OTC Desk Market Update: Rising Geopolitical Tensions — What This Means for Crypto Volatility
Welcome back to our weekly market update! Here are the top things we’ll be paying attention to this week:
- Bitcoin Halving.
- U.S. Initial Jobless Claims Report on Thursday.
- Options Expiry on Friday.
Macro
Overview of March Consumer Price Index Report
The U.S. Consumer Price Index (CPI) for March was higher than expected, accelerating by 0.4% for the month. This pushed the annual inflation rate to 3.5%, an increase of 0.3 percentage points from February. These figures surpassed the forecasts from economists surveyed by Dow Jones, who anticipated a 0.3% monthly gain and a 3.4% annual rate.
Fed’s Response and Economic Outlook
Multiple Federal Reserve officials have voiced the need for patience regarding rate reductions, noting that inflation has not sufficiently moved towards the 2% annual target. The continuous strong inflation readings suggest that previous hopes for a disinflationary trend may be fading. This cautious stance is expected to influence the Fed’s policy decisions moving forward as markets re-price rate cut expectations.
Crypto Market Overview
Implied and Realized Volatility
Before geopolitical tensions spilled over this weekend, Bitcoin (BTC) had stabilized around a 50 realized volatility (RV). As of right now, BTC’s realized vol is 68. Conversely, implied volatility (IV) has consistently been higher, maintaining a level around 70 for BTC this week. With a spread of about 20 vols, which is considered attractive for gamma selling, one would think the market’s appetite to engage in this trade would be high. However, leading up to the weekend traders were not taking advantage, mostly due to anticipated volatility from upcoming events such as the Bitcoin halving and external economic and geopolitical factors. They ended up being right on the latter as any short term sellers of options were wiped out when implied vols reached a high of 98 on Saturday.
Ethereum (ETH) realized volatility spent most of the week around 65, with implied volatility holding a slight premium of about five basis points over Bitcoin at 75. With a higher realized volatility, ETH was not as attractive as BTC for gamma sellers, but 10 vols is attractive enough for sellers to take advantage of the positive carry. Like BTC, ETH implied volatility spiked around the news of geopolitical tensions, reaching a high of 124.
Term Structure and Skew
Front end term structure in both BTC and ETH remain in backwardation after Saturday’s volatility spike. Back end term structure shifted slightly but not much movement as a week ago, reflecting how much of the weekend’s price action has not changed the post halving positioning of option traders. It is worth mentioning that BTC’s curve has actually shifted lower from a week ago, which is definitely something to watch with the halving this coming week.
Heading into the week we saw there was a significant put skew develop, indicating fear of price declines, which then transitioned to call premium as the week progressed. This has obviously shifted back to puts as traders aim to take advantage of any further volatility spikes related to the halving or further geopolitical tensions. 3-month skew is still showing calls are well bid as traders position themselves for the post-halving.
Options Flows and Positioning
There had been a noted decline in total option flows with BTC volumes down to $7.5 Billion USD and ETH flows flat at around $5 Billion USD. Notable trades were $64,000/$71,000 USD strikes, in a risk reversal trade to play the halving and long dated calls for traders anticipating a rally into and post the Bitcoin halving. With Ethereum options flows relatively flat, the majority of activity centered around short-dated calls, as we can see from how flat backend term structure is in ETH.
Market makers in Bitcoin and Ethereum options were already positioned short gamma heading into the CPI report and the weekly expiry, with most of the concentration between the $65,000-$75,000 USD strikes. This positioning forces dealers to manage risk by hedging in the direction of market momentum. The magnitude of the sell-off on Saturday was amplified because of this dynamic and as it stands right now not much has changed other than an increased negative position in ETH relative to a week ago. This is a set up that traders and investors should be paying attention to heading into a week with the monthly options expiry this Friday.
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.
