Option Pit Crypto - May 8th, 2024

Option Pit Crypto – May 8th, 2024

Greg Magadini

BY GREG MAGADINI

May 8, 2024

Hey Crypto Traders!

Here is this week’s Crypto update

USA Week Ahead:

Throughout Week: Fed governors speak
No big economic announcements

Macro Recap

Although last week had a large amount of important economic releases, this upcoming week is virtually quiet (for the exception of Federal Reserve governor appearances).

The NonFarm Payroll number came in with +175k jobs for April (vs) +315k in March. The services sector showed only a slight increase of +5k (vs) +53k in March, suggesting that there’s finally some slack in the tightest part of the labor market.

Finally, the Unemployment Rate actually ticked up from 3.8% → 3.9% while the average hourly wages dropped to +3.9% (y/y) (vs) 4.1% in March and 4.3% in Feb.

All taken together, we’re seeing a welcome softening in the latest jobs report. This is a slowdown but also nothing that’s completely gloomy and disastrous. A perfect balance.

Last week the stock market rallied, VIX dropped and bonds rallied.

Without any major news events this week, I expect to see volatility continue to drop and markets close the week nearly unchanged. That’s my “base case”.

(S&P Emini Futures /ES 5-day 15min chart ThinkOrSwim)

(VIX 5-day 15min chart ThinkOrSwim)

(Bond Futures /Zb 5-day 15min chart ThinkOrSwim)

BTC: $64,082 (+0.8% / 7-day)

ETH :$3,151 (-5% / 7-day)

SOL :$147.28 (+4.9% / 7-day)

(BTCUSD 12-month Realized Volatility Cone)

Realized volatility in Bitcoin (Ticker: BTCUSD) continues to be in the upper 75% percentile for the past 12-months.

Although 2023 was a historically low volatility year for BTCUSD and therefore the past 12-months are statistically lower than the past 5-years, I do think BTCUSD is likely going to continue to have structurally lower volatility.

Current 30-day realized volatility sits at 64% while the 30-day median is 44%. This gives us a lot of room to see volatility move lower.

(BTCUSD At The Money Implied Volatility)

We can see here that the past year of implied volatility term structure looks to have topped out in early April. We’re still currently seeing elevated implied vol that matches the October 2023 “$30k breakout” when BTCUSD jumped from below $30,000 to $35,000 in one day.

Given the context of volatility events now passed: Israel conflict, spot ETF, ETF inflows and halving… What’s there left to keep volatility elevated?

Fundamentally I only see lower volatility.

(BTCUSD ∆25 Risk Reversal-Skew normalized by ATM volatility)

Lastly, looking at the 25 delta Risk Reversal-Skew (25 delta call and 25 delta put) we can see that short-term RR-Skew (7-day and 30-day) have been able to get back into positive territory over the weekend.

NonFarm Payrolls seemed to have weakened the dollar and lifted asset prices higher, including BTCUSD, but BTCUSD remains in a consolidation range here (in my opinion).

Selling the RR-Skew in a delta neutral manner is also another interesting way to trade the current “consolidation” range.

Paradigm’s Week In Review

BTC -1.07% / ETH -5.15% / NDX +0.48%