OTC Desk Market Update | Understanding the Bullish Skew — Insights from Recent Options Flows
Welcome back to our weekly market update! Here are the top things we’ll be paying attention to this week:
- Thursday, October 10th — U.S. Consumer Price Index (CPI) Inflation Data
- Friday, October 11th — U.S. Producer Price Index (PPI) Inflation Data
- Friday, October 11th — Canadian Unemployment Rate and Full-Time Employment Data
Macro Update
United States (U.S.)
Stronger Than Expected Labor Results Complicate Rate-Cut Path
Last week, the focus was on U.S. labor market data. First, the Job Openings and Labor Turnover Survey (JOLTS) report showed that job openings in the U.S. stood at 8 million, up 300,000 open jobs from the prior report. That said, the JOLTS report showed declines in both the new hires rate and job quits rate, both to levels not seen since 2019. New hiring activity and job quits are both signs of a healthy labor market with ample opportunities for employees, so declines in these measures may signify concerns about future headline measures.
On Friday, the Bureau of Labor Statistics (BLS) employment report for September was released, showing that nonfarm payrolls increased 254,000 jobs, a blowout number compared to 132,000 forecast and 159,000 in the prior month. U.S stocks jumped on this news, with the S&P500 index rising 0.9% and the NASDAQ100 rising 1.2%. 9 out of 11 S&P sectors finished the week in the green. This data also changed the pricing of Fed Funds futures, with markets essentially taking the prospect of a 50-basis point cut in November off the table, pricing the probability at just 5% versus 32% before the report.
ISM Surveys Show Marginal Improvement In Services
The Institute for Supply Management (ISM)’s well-known suite of survey data was released this past week for the month of August. The ISM Services component came in at a figure of 54.9, indicating robust economic activity. This is the highest level that ISM Services has been since February 2023. That said, the overall composite for employment data reported by ISM fell to 48.1, confirming a contraction in employment activity. As a reminder, values above 50 on the ISM represent expansions, while values below 50 represent contraction.
Oil Rises Sharply on Geopolitical Tensions
The price of crude oil futures rose 8.5% this week, as Iran attacked Israel with ballistic missiles. Israeli and American leaders have publicly discussed retaliating by targeting Iran’s oilfields and energy production capacity. If they follow through, expectations are that global oil supplies would fall as Iran is the world’s 7th largest oil exporter. This could push the price of oil, and downstream the price of gasoline and other energy products higher, potentially leading to higher consumer prices and a revival of the global inflation threat.
Canada
Canadian PMI Data Reiterates Economic Weakness
A relatively quiet week in Canadian economic news was headlined by the release of S&P Global’s Purchasing Manager’s Index (PMI) reports. The services PMI measure of business activity came in at 46.4, down from 47.8 in August and firmly below the 50 mark, indicating a contraction. This represents a near four-year low in the data point, comparable to the depths of the COVID-19 pandemic. Within the headline measure, the new business index fell to 44.7, the worst reading since December 2020, and the measure of employment worsened to 47.7 versus 49.4 in August.
This data represents further confirmation that the Canadian economy is broadly slowing, giving cover for the Bank of Canada to continue pursuing interest rate reductions. Markets are pricing in 75 basis points of BoC cuts by the end of 2024, from the current level of 4.25%.
The Week Ahead
The week ahead centers on U.S. inflation data and Canadian employment data.
On Thursday, October 10th the U.S. Consumer Price Inflation (CPI) report for September will be released. Expectations are for a CPI print of 2.3% year-on-year, versus a 2.5% reading in August. Then on Friday, October 11th, the Producer Price Index (PPI) inflation measure will be released, with expectations of a 0.1% increase, relative to 0.2% in the prior month. Lower than expected CPI and PPI inflation readings would likely spark confidence in traders’ assessments that the future path of U.S. monetary policy is for greater accommodation and easing.
In Canada, the last major trading week before Thanksgiving holiday will focus on labor and employment data. The biggest item is the Statistics Canada employment report, where the unemployment rate is expected to stay steady at 6.6%. The change in the number of full-time jobs will also be closely watched, as the previous report showed a loss of over 43,000 full-time positions nationwide despite a headline figure of +22,000 overall jobs. For September, the expectation is for an addition of 33,000 new jobs, but the makeup of that figure will be just as important as the headline number.
Crypto Market Overview
The past week has highlighted significant shifts in both Bitcoin (BTC) and Ethereum (ETH) volatility metrics. The increase in implied volatility, coupled with the steepening term structure and bullish skew, suggests that market participants are preparing for potential price movements. Options flows further reinforce this sentiment, indicating a predominantly bullish outlook tempered by prudent hedging strategies.
Implied and Realized Volatility
Over the past week, Bitcoin’s implied volatility (IV) exhibited a notable increase, rising from 45% to 50%. This uptick suggests that market participants anticipate heightened price movement in the near future, likely driven by macroeconomic factors and regulatory news affecting the broader cryptocurrency landscape.
In contrast, realized volatility (RV) for BTC remained relatively stable, hovering around 30%. This discrepancy between IV and RV indicates that traders are pricing in potential future volatility that has not yet materialized in the market, possibly due to upcoming events such as earnings reports from major crypto firms or broader economic data releases.
Ethereum followed a similar trajectory, with implied volatility increasing from 40% to 47%. The spike in IV suggests growing concern among traders about Ethereum’s ability to navigate the current market conditions, especially in light of ongoing developments in decentralized finance (DeFi) and potential regulatory scrutiny.
Realized volatility for ETH, however, lagged behind, sitting at approximately 28%. This lower RV compared to IV may reflect a market that is still consolidating, with many traders waiting for clearer signals before committing to more significant positions.
Term Structure and Skew
The term structure of volatility for both BTC and ETH shows a steepening pattern, with short-term options experiencing higher implied volatility compared to longer-dated options. For Bitcoin, the 30-day IV is significantly higher than the 90-day IV, indicating a preference for short-term hedging or speculative positions. This trend suggests that traders are concerned about immediate price movements rather than long-term stability.
For Ethereum, a similar pattern is observed. The 30-day IV stands at 47%, while the 90-day IV is around 42%. This steepening indicates heightened uncertainty or risk aversion among traders, likely reflecting recent market events or upcoming catalysts.
When examining skew, both BTC and ETH exhibit a bullish skew, where out-of-the-money (OTM) call options are more expensive than OTM put options. For Bitcoin, the skew ratio has tightened, reflecting increased demand for upside exposure as traders anticipate potential bullish momentum. Ethereum’s skew also reflects a strong preference for calls, suggesting that market sentiment leans towards bullishness despite the observed volatility.
Options Flows and Positioning
Option Flow Analysis
Options flows for Bitcoin have seen significant activity over the past week, with notable demand for OTM call options, especially around the $35,000 USD strike price. This interest indicates that traders are positioning for a potential rally, possibly spurred by positive news or technical breakout levels.
For Ethereum, options flows have also been heavily skewed towards call options, particularly around the $2,500 USD strike. This aligns with the bullish sentiment seen in the skew analysis and suggests that traders are eager to capitalize on anticipated upward momentum.
Positioning Insights
Analysis of positioning reveals a mixed landscape among options traders. While the majority are leaning towards calls, there remains a healthy volume of put options, indicating that some traders are hedging against potential downturns. The overall positioning suggests that while optimism prevails, there is an awareness of the inherent risks in the current market environment.
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.
