TI Weekly Options Market: Waiting for Volatility

Based on the data of the options market last week, we find that:

• The market sentiment was obviously negative, and transactions in the options market were relatively flat.

• The on-value options of Bitcoin in Q4 were at a premium, which indicates that some investors may be betting on volatility.

• The Federal Reserve announced last week to reduce its bond purchase, which had slight influence on crypto assets.

• Ethereum's forward implied volatility surface remained leftward, which showed a confidence in the long term.

Bitcoin

In the first week of June, the performance of the crypto asset market was relatively calm. The spot price of Bitcoin has been fluctuating at around $35,000 with no market conditions more than expected. Investors need to be reminded that there seems to be a certain "abnormality" in the block transaction that the Bitcoin block transaction under premium caliber was not consistent with that under the contract caliber. Some institutional investors may be actively buying out-of-value options.

Bitcoin options premium trading volume (left) and Bitcoin options contract trading volume (right), as of 20:00 on June 7th, data source: gvol.io

According to the implied volatility surface in the short and medium term, Bitcoin price stabilization did not change investors' pessimistic expectations. The slightly exaggerated left-biased surface shows that put options are still the focus of trading, and the market with falling volatility is not as stable as it seems.

Changes in the mid-term and short-term implied volatility surface of Bitcoin options, as of 18:00 on June 7, data source: gvol.io

In terms of the long-term implied volatility surface of Bitcoin, it shows a certain improvement. The curve indicates that there is a slight premium for Bitcoin on-value options expiring in December. Some investors are buying forward on-value options, deploying Vega, and betting on volatility. Investors should be reminded that this pattern has appeared for two consecutive weeks.

Bitcoin options long-term implied volatility surface, as of 18:00 on June 7, data source: gvol.io

The Federal Reserve announced on June 2 that it would begin to gradually reduce its purchase on the investment portfolio of Secondary Market Corporate Credit Facility (SMCCF). The Federal Reserve Bank of New York announced that it would begin to sell market bonds held by it. Both Nasdaq and gold showed significant decline. On June 4, the US nonfarm payroll was low. As the economic recovery was not as expected, investors believed that there was still room for "Taper". Nasdaq rose by 1.47% (the largest one-day increase in two weeks), and gold price recovered again. While other assets were affected by macro factors, Bitcoin's response to monetary policy was relatively plain, and the main line of concern for the market was obviously not the interest rate policy.

It is true that institutional investors are indifferent to Bitcoin. According to the latest data from Coinshares, crypto asset funds with Bitcoin as the underlying asset once again have a net outflow, with an outflow of $140 million in a single week. We have reminded investors in the weekly report to pay attention to the movements of institutional investors. According to public information, MicroStrategy expects to confirm an impairment loss of $284.5 million due to the sharp fluctuations in currency prices.

Crypto asset fund inflows, as of 20:00 on June 8, data source: Coinshares

The term curve of Bitcoin's implied volatility shows premium. Compared with last week, the center of the curve has not shifted downward. At the same time, the premium of the term curve is not obvious, and the short-term volatility is not low.

The term structure of the implied volatility of Bitcoin options, as of 20:00 on June 7th, data source: gvol.io

From the perspective of high-level data, the implied volatility of Bitcoin has begun to stabilize, returning to double digits. Investors are reminded that the current implied volatility level is still 20% higher than that before the "519". As for skewness indicators, traders are more focused on the allocation of put options.

Bitcoin options implied volatility (left) and skewness (right) changes in the past month, as of 18:00 on June 7th, data source: gvol.io

Through the historical quantile chart to observe the volatility, as the Bitcoin spot market was relatively stable this week, the realized volatility further dropped.

Realized volatility historical quantile chart, as of 18:00 on June 7th, data source: gvol.io

As for the realized volatility, it has fallen to the same range as the historical volatility, and the market has entered a relatively stable state.

Comparison of realized volatility and implied volatility, as of 20:00 on June 7th, data source: gvol.io

Ethereum

In the past seven days, the spot price of Ethereum has been fluctuating around $2,500. In the context of narrow fluctuations, Ethereum options trading was relatively normal. The block trade did not provide us with more information.

Ethereum options premium trading volume (left) and Ethereum options contract trading volume (right), as of 20:00 on June 7th, data source: gvol.io

The implied volatility surface in the short and medium term is similar to Bitcoin's. Ethereum has not been able to stand alone in the pessimistic market environment. The implied volatility surface in the short and medium term shows a left-biased pattern. Put options are still used as the main direction of allocation. Investors are not optimistic about the short-term price performance of Ethereum.

The medium and short-term implied volatility surface of Ethereum options, as of 20:00 on June 7th, data source: gvol.io

In the weekly report last week, we were worried that the price adjustment of crypto assets would affect the on-chain economic activities, thereby affecting the development of the industry. According to the historical data displayed by the Ethereum explorer, the changes in on-chain economic activities are consistent with the changes in the token price. This conclusion can be verified from the cycle in 2018. As of the post, the daily trading volume on Ethereum has fallen back to the level of Q3 in 2020. Although the spot price of crypto assets has stabilized, the on-chain economic activities have not shown signs of recovery.

Ethereum daily transactions chart, as of 20:00 on June 6, data source: etherscan.io

We hope to conduct a second verification on the data of the staking amount. According to the staking amount provided by the defipluse website, Ethereum's on-chain staking tokens have dropped significantly in this adjustment. From the perspective of USD, the amount of on-chain staking in June dropped by 30% compared to the peak in May. In terms of the amount of Ethereum, the amount of staking on Ethereum dropped by about 10%. The amount of staking and transaction data of the token can reflect the activity of on-chain economic activities. In fact, the impact of falling prices on the on-chain economic activities is real.

Change in Ethereum staking amount (left), change in overall USD staking amount of token (right), as of 20:00 on June 6th, data source: defipulse

From the long-term implied volatility surface, it can be found that traders are still optimistic about the long-term value of Ethereum. We can clearly see that in the quarterly contracts of Q4 this year and Q1 next year, it is very obvious that the call options of Ethereum have been traded at a premium. In addition, the premium structure of forward on-value options also appears on the implied volatility surface of Ethereum.

Ethereum options forward implied volatility, as of 20:00 on June 7th, data source: gvol.io

Unlike Bitcoin, the implied volatility term curve of Ethereum shows a hump pattern. The premium trading of options in September is probably due to the upgrade of Ethereum in Q3, in which investors can seek profit opportunities. At the same time, the short-end volatility of Ethereum dropped to 110, and investors' expectations of market volatility were re-priced.

The term structure of the implied volatility of Ethereum options, as of 20:00 on June 7th, data source: gvol.io

Observing high-level data, the implied volatility of Ethereum on-value options is 20% higher than that of Bitcoin. The skewness of Ethereum is around -10, just like Bitcoin's. With the same skewness and higher implied volatility, Ethereum seems to have higher return elasticity in the expectations of investors.

Changes in the implied volatility (left) and skewness (right) of Ethereum options in the past month, as of 20:00 on June 7th, data source: gvol.io

The historical quantile chart shows that the realized volatility of Ethereum has dropped to a certain extent, but it is above the historical average.

Realized volatility historical quantile chart, as of 20:00 on June 7th, data source: gvol.io

Benefiting from the narrow volatility of the market, the realized volatility of Ethereum has dropped significantly.

Comparison of realized volatility and implied volatility, as of 20:00 on June 7th, data source: gvol.io

Conclusion

The crypto asset market seems to have gradually recovered from the decline, and the spot prices of Bitcoin and Ethereum have gradually stabilized. However, some investors in block trades seem to be betting on volatility, on which the trading structure of options has confirmed. Taking into account the current negative market sentiment, investors should be careful of short-term trading changes.