TI Weekly Options Market: Just Fluctuation

On May 12, the US released economic data for April. The CPI surged 4.2% from a year earlier, the highest level since September 2008. Core CPI rose 30% from a year earlier, the highest increase since January 1996. Inflationary pressures will affect the pace of the Federal Reserve's monetary policy, and investors' fears of a higher-than-expected rise in inflation have triggered sharp swings in equity markets. The digital asset market took a big hit last week, compounded by a bad external environment and a bearish outlook for the industry (Musk has taken a bearish view on Bitcoin). Both Bitcoin and Ethereum saw significant declines: Bitcoin fell from $50,000 to $42,000 and Ethereum from $4,300 to $3,200. The extreme unilateral market accompanied by large - scale liquidation. As of this post, the two main tokens in the digital asset market have both fallen more than 30% from their highs.

Summarizing last week's options market data, we found that:

• Volume in the options market increased again as investors rushed to buy put options to protect positions;

• The ATM implied volatility of Bitcoin rose to 110;

• Ethereum is down more than 30% and the forward implied volatility curve remains positive;

• The market seems to have more confidence in Ethereum than Bitcoin.

Thanks to Bit.com for supporting the important data content of this article. Professional options trading platform, please visit: Bit.com

Bitcoin

Last week, Musk's bearish comments hit the spot price of Bitcoin, with investors buying options to deal with price changes. Volume in the Bitcoin options market has risen sharply over the past seven days. Behind the jump in implied volatility, Bitcoin option skewness turned from positive to negative, and put options were frantically bought by investors, showing the market weakness. The move comes just five days after Ethereum hit an all-time high of $4,300.

Bitcoin option premium turnover (left) and Bitcoin option contract turnover (right), as of 20:00 on May 17, data source: gvol.io

Last week, digital asset funds saw their first net outflows this year, according to the latest data from CoinShares. It's worth noting that the last time the fund saw an outflow of this magnitude was in May 2019. Digital funds that invest in Bitcoin saw the biggest outflows, with $98 million in outflows in a single week. In addition to Bitcoin, other types of digital asset funds have generally seen inflows, and institutional investors appear to be diversifying their allocation.

Digital asset fund inflow, data source: coinshares

The spot price of Bitcoin fell sharply, and the impact on the short- and medium-term implied volatility curve was more obvious, showing an obvious left-bias pattern. Short-term market was filled with a certain sense of panic.

Changes in the mid-term and short-term implied volatility curve of Bitcoin options, as of 18:00 on May 17, data source: gvol.io

Despite some structural loosening, the forward implied volatility curve remains slightly skewed to the right. In the long run, the market hasn't completely lost faith in Bitcoin.

Bitcoin option forward implied volatility curve, as of 18:00 on May 17, data source: gvol.io

According to the liquidation data tracked by bybt, the scale of contract liquidation caused by this market adjustment is relatively small, and only less than 5 billion contract positions were liquidated on May 13. It is worth noting that this adjustment is far greater than "4.18" (this fall is the largest adjustment since this round of bull market), but the scale of liquidation caused is not so obvious.

The situation of liquidation in the digital asset market, source: bybt

The term curve of Bitcoin's implied volatility exhibits a "Backwardation" structure. Traders' competition for put options raises the short-end implied volatility to a very high level.

The term structure of the implied volatility of Bitcoin options, as of 20:00 on May 17, data source: gvol.io

Observed from high-level data, with the drop in spot prices and the spread of market panic, the implied volatility of Bitcoin in-value options jumped to a monthly high. At the same time, the value of option skewness took a sharp turn, dropping to a minimum of -15. Combining the above indicators, it can be seen that investors are racing to buy put options, seeking combination price protection.

Bitcoin options implied volatility (left) and skewness (right) changes in the past month, as of 18:00 on May 17, data source: gvol.io

Through the historical quantile chart to observe the volatility, huge market adjustments have almost pulled the actual volatility in all windows above the 50% quintile. More importantly, if the market is repaired, Bitcoin's actual volatility seems to still have room to rise.

Actual volatility historical quantile chart, as of 20:00 on May 17, data source: gvol.io

Observing the historical changes in volatility, the implied volatility of options is far ahead of the actual volatility. Given that such an extreme pattern may not be sustainable, for investors, selling short-term volatility seems to be a good choice.

Comparison of actual volatility and implied volatility, as of 20:00 on May 17, data source: gvol.io

Ethereum

Last week, the Ethereum options market was very active, especially in terms of premium.

Ethereum option premium turnover (left) and Ethereum option contract turnover (right), as of 20:00 on May 17, data source: gvol.io

Ethereum has suffered heavy losses in this market adjustment. From a short-window analysis, the implied volatility curve to the left indicates that some investors are no longer optimistic about the recent market performance of Ethereum.

The short- and medium-term implied volatility curve of Ethereum options, as of 20:00 on May 17, data source: gvol.io

The long-term implied volatility curve of Ethereum still maintains a positive shape. Among them, the long-term curve ignores this adjustment, showing a clear right-biased structure. At the same time, the skewness of forward options dropped by only 5%. Compared with Bitcoin, investors have higher expectations for Ethereum.

Ethereum option forward implied volatility, as of 20:00 on May 17, data source: gvol.io

In the previous weekly report, we mentioned that Ethereum and Bitcoin present different term structures due to the differentiated market performance. When faced with the same market environment, the two gave unanimous responses. Similar to Bitcoin, Ethereum also exhibits a very obvious "Backwardation" structure. The rise in early May has lifted the implied volatility to a higher level. Under the base effect, it is difficult for the implied volatility to jump further. When such a market environment provides a good time window for selling short-term options.

The term structure of the implied volatility of Ethereum options, as of 20:00 on May 17, data source: gvol.io

Observing high-level data, the ATM implied volatility of Ethereum options rose to the highest level in 30 days. It is worth noting that compared to the previous week's breakthrough of Ethereum's record high, the market's response to this decline more intense. In terms of skewness, Ethereum's option skewness value dropped to -10, which still has many advantages compared to Bitcoin's minimum skewness value (-15).

Changes in the implied volatility (left) and skewness (right) of Ethereum options in the past month, as of 20:00 on May 17, data source: gvol.io

The market as a whole is more optimistic about ETH than BTC. There are two main reasons: the first is that the deflationary market that Ethereum upgraded in July, and the second is that the market attributed the decline to Elon Musk too much.

I personally think that these two points are actually relatively fragile arguments-the sharp rise of ETH in the past 3 months is largely due to the positive feedback of the shortage of supply caused by DeFi mining lock-up. The Achilles heel of DeFi mining is impermanence loss-it is a function proportional to the square of volatility.

If the market continues to fall to ETH<3k, then the above positive feedback has a chance to turn into a downward positive feedback, then we may see 2k of ETH. Of course, if this happens, it will be a rare opportunity for bargain-hunting.

From the perspective of options, Eth's skewness should remain at a relatively high negative level for a period of time.

Bit.com COO Daniel

Observing from the historical quantile chart, Ethereum fell all the way from US$4,300 to US$3,200, directly erasing the 35% cumulative increase. The actual volatility of Ethereum in the near-end window period (7D) is within the historical quantile range of 75%.

Actual volatility historical quantile chart, as of 20:00 on May 17, data source: gvol.io

Compared with the actual volatility, the implied volatility of Ethereum shows a certain discount, and the market is still optimistic about the price of this decline.

Comparison of actual volatility and implied volatility, as of 20:00 on May 17, data source: gvol.io

Conclusion

Although market volatility has not stopped, the weekly options report defines this adjustment as an event shock. After May, there have been ridiculous altcoins in the market one after another. Some investors have quietly increased the leverage in their trading accounts. The market full of blind optimism is often very vulnerable when faced with event shocks. The investment strategy is built to deal with the unknown, and we need to remain in awe of the market.