OTC Desk Market Update: Crypto Insights — How ETH Call Sellers are Impacting the Price of ETH
Welcome back to our weekly market update! Here are the top things we’ll be paying attention to this week:
Macro
In Friday’s U.S. Non-Farm Payroll (NFP) report, it became evident that the Federal Reserve’s “restrictive policy” is unable to effectively implement a monetary contraction substantial enough to counter fiscal spending. The strong employment data of the last week reflects the U.S. economy’s robust expansion, which is the most vigorous since World War II, driven mostly by government deficit spending. The irony of course being the expansion of the U.S. deficit is because the Fed has raised rates, requiring the U.S. Treasury to pay higher interest on U.S debt. Because that debt is an asset of the private sector it provides income to households and corporations, which helps support growth rather than contraction. The market’s reaction on Friday, a mere two days after a hawkish press conference from Chairman Powell, served as a reality check for those who still believed in the Fed’s ability to induce a recession.
The likelihood of a March rate cut is diminishing in short-term interest rate markets, indicating a move towards a normalized Fed funds rate, rather than a prolonged “tighter for longer” policy. Despite this, the U.S. economy’s enduring strength is evident in the consistent low initial jobless claims, demonstrating a historical resilience that many still fail to fully recognize, challenging prevailing market beliefs.
Crypto Market Overview
Implied and Realized Volatility
Realized Volatility (RV) in Bitcoin (BTC) was relatively stable this week, fluctuating between 38 and 42. Ethereum (ETH) on the other hand had a steep drop from 50, falling to a similar level as BTC with a premium of about 2 vols. Implied Volatility (IVs) experienced a similar dip, especially in weekly expirations, losing around six to seven vol points in both assets. However, the one-month scenario remained relatively stable, with Ethereum showing a more pronounced negative implied volatility of six vols.
Term Structure and Skew
BTC term structure has shifted back into contango, characterized by an upward-sloping curve. The collapse in the front end, particularly in weekly expirations, is noted, with the weekly implied volatility down by approximately four vol points. ETH term structure is similar, with the long end of the curve down slightly from last week as the call sellers we spoke about last week continue to show up in size.
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Skew in both BTC and ETH has shifted back to call premium, even in the face of Ethereum’s lagging performance. The impact of call overwriters dominating Ethereum can’t be overstated, as it is influencing the underlying asset by compressing the distribution of outcomes. This can cause traders to underestimate Ethereum’s potential for a breakout if a strong fundamental narrative emerges. Additionally, it highlights the role of spot chasing activity in driving short-dated options and skew movements in crypto.
Options Flows and Positioning
Options volume is up 10% week-over-week, with the majority of that volume being call options, particularly in Bitcoin. Large buyers are noted for 29 March $50,000 USD and $75,000 USD strike calls. In Ethereum, on-screen volumes, especially for February $2,400 USD and $2,500 USD strike calls, are also worth noting. Gamma positioning in ETH and BTC continue to be divergent due to the behavior of traders in each asset. The call selling in Ethereum is leaving dealers long gamma at the higher strikes and has begun impacting realized volatility.
Ethereum’s struggle to keep pace with Bitcoin and other Altcoins can be attributed to the call/gamma selling. Ethereum’s gamma positioning, particularly in the $2,400 USD to $2,500 USD range, indicates significant long gamma exposure for dealers, which creates resistance at those levels as dealers will sell Ethereum futures to stay hedged, impeding Ethereum’s ability to rally.
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.
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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.