OTC Desk Market Update: The Ethereum Shift — Call Overwriting Flows and Shifting Market Dynamics
Welcome back to our weekly market update! Here are the top things we’ll be paying attention to this week:
Macro
So far 2024 has begun the same way as 2023, with better-than-expected outcomes in macro data. It seems consensus is still adjusting to some of the dynamics we spoke about in our year-end issue. The latest data release to significantly beat expectations is U.S. Q4 GDP which came in at 3.3% quarter-over-quarter beating the consensus of 2% growth. This growth was driven by a surge in real consumption, which played a key role in propelling the economic expansion. Additionally, nominal GDP, which does not account for inflation, also saw a notable rise with a 4.8% annualized growth rate.
With interest rates at 20-year highs, one must ask about the efficacy of rate hikes. If the point of the hikes was to bring down demand and real consumption is driving GDP growth, can we honestly give central banks credit for the current economic outcome?
Other than GDP, we saw a recent report on inflation expectations fall to 2020 lows at 2.9%, and the Michigan Consumer Sentiment index rose to 78, beating consensus expectations of 70.
Crypto Market Overview
Implied and Realized Volatility
After collapsing into the 30’s realized volatility (RV) is now in the 40s for Bitcoin (BTC) and in the 50’s for Ethereum (ETH). This outperformance in RV for Ethereum began on Tuesday as ETH broke the $2,400 USD level and BTC dipped below the $40,000 USD level.
Implied volatility (IV) also spiked during that time, reaching 75 for ETH and 66 for BTC. Since then, IV has come down in both assets and is now in line with the 12 month average in the mid-40’s.
Carry, which was briefly positive has now turned negative as the volatility spike during the week led to an unwinding of call over writing strategies (volatility selling strategies). Call overwriting has become a very popular strategy in crypto options trading and when it is done, it is done in significant size and can create some interesting effects to the underlying asset. Ethereum is an example of an asset being adversely affected by the behavior of options traders who have become accustomed to selling calls in ETH to generate income. This has contributed to dampening ETH volatility in the short term, but occasionally, the trade is unwound violently (think back to August 2023) reinforcing the spike in volatility.
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Term Structure
BTC term structure is still in backwardation and has shifted slightly lower from a week ago, but over 20 points from a month ago. The realization of the ETF approval has truly changed the volatility landscape in crypto and we have yet to see any evidence that the same behavior will repeat for the upcoming halving. Options for April and later maturities are not pricing in the same level of anticipation as the ETF did. Much of this is likely because the halving is not a one-day event like the ETF.
ETH term structure is similar to BTC, but more pronounced due to some of the call selling dynamics we mentioned earlier. The long end of the curve is coming under pressure again as call over writers begin to return, after we closed the week with a positive GDP print and positive price momentum in crypto.
Options Flows and Positioning
Option volumes in BTC were down 60% as trading around the ETF announcement has died down and traders have taken positions off the table. Spot prices slipping below $40,000 USD also contributed to the decline in volumes as traders were already positioned in January 26 puts before the decline. We saw more downside protection being purchased with March 29th $30,000 USD puts being bought as well as the February 23rd $44,000 USD straddles which ended up being well-timed trades as volatility spiked on Tuesday.
Volumes were not down as much in ETH, showing a 20% decline. As we mentioned earlier the propensity to sell volatility in ETH is much higher due to its underperformance relative to other digital assets. This has allowed ETH volumes to be less volatile than BTC, especially now that we are past the ETF announcement. Whereas most of the volumes in BTC were purchasing downside exposure in the form of puts or volatility exposure in the form of straddles, traders are more interested in selling volatility in ETH with the Jan 26 Calls being sold as well as the June 24th strangles (a strangle strategy involves going short an OTM put and short an OTM call).
BTC gamma is still negative with a large concentration at the $42,000 USD strike as a function of the puts purchased at that level. The $40,000 USD and $44,000 USD level are also now contributing to negative gamma exposure positioning as more traders purchase downside protection in BTC.
ETH positioning dipped slightly but remains mostly positive as volatility selling in ETH continues to ramp up. The difference in positioning in both these assets is worth noting, as positive and negative gamma positioning have different effects on the underlying asset. For a breakdown of these effects see the following YouTube explainer: Gamma Exposure.
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.