Last Week’s 3 Big ARKK Buys

Hey Traders,

Cathie Woods’ ARK Innovation ETF (Ticker: ARKK) is no stranger to the media spotlight.

A quick Google search will yield thousands of recent results … and many of them don’t exactly paint the ETF in the most flattering light.

Nevertheless … ARKK persists, and Woods continues to actively manage the ETFs holdings, hoping for a return to ARKK’s 2020 glory, where the ETF handily outperformed the broader market, returning a whopping 156.6%.

So where is ARKK looking for its next big hit?

Here’s the three largest trades the ETF made last week.

Coinbase (Ticker: COIN):

Since it’s IPO in April 2021, COIN has been the subject of plenty of speculation. The first publicly traded crypto-specific exchange soared in the hours immediately following its debut, but the shares quickly returned to earth. Currently, COIN sits around $230 – slightly off its $250 IPO price.

COIN makes up ARKK’s fifth largest holding, with 5.6% of the ARKK portfolio dedicated to COIN shares, and with ARKK now holding 1.64% of all COIN shares.

Perhaps it is COIN’s low price that inspired the innovation ETF to add to its position?

Last Monday (January 10), ARKK purchased an additional 86,295 shares of COIN, on a day where the cryptocurrency exchange stock was trading around $225.

However, it should be noted that during December, ARKK sold 281,402 COIN shares, so this latest addition may be re-building their previous position, while lowering their cost basis (which is currently $285.12).

What are the pits saying?

Currently, open interest is slightly higher than average, at 105% of its typical amounts. While calls outnumber puts 1.2-to-1, put open interest is higher than normal, at 110% of its typical amounts. 30-day historic volatility (HV) sits nearly even with 30-day implied volatility (IV), suggesting that options seem to be fairly priced, considering the amount of movement COIN typically sees.

The most popular contracts are the front-month puts, with the 165-strike and 220-strike seeing the highest concentration of open interest of any other COIN contracts. 

Rounding out the top five are the front-month 300-strike, 400-strike, and 250-strike calls.

Zoom (Ticker: ZM):

Another name catching ARKK’s eye is video communication stock ZM.

After hitting an October 2020 high, ZM has slowly given away many of its pandemic-induced gains, though still sitting above its pre-pandemic levels at $159.72.

Last Thursday, ARKK added an additional 174,640 shares to its ZM holdings, which now accounts for 6.4% of ARKK’s portfolio – it’s second largest holding behind Tesla (Ticker: TSLA). ARKK’s holdings account for 2.2% of ZM’s shares.

Again, it seems as though ARKK could be trying to lower its cost basis, as its average purchase price for ZM is a whopping $324.65 – ouch!

In the pits, call buyers seem to be piling on more than usual, with call open interest at 112% of its typical levels, and calls outnumbering puts 1.1-to-1. Specifically, traders are targeting the February 180-strike calls and March 170-strike calls.

Traders aren’t exactly getting a whole lot of bang for their buck, with ZM’s 30-day IV sitting above its 30-day HV, indicating the pits are pricing in more movement than ZM has been seeing as of late.

Roku (Ticker: ROKU):

ROKU was another ARKK target last week, and is yet another tech stock down from its 2020/2021 highs:

The shares closed on Friday at $167.48, their lowest close since September 2020.

However, ARKK once again seemed to be bargain shopping, snapping up 163,353 shares of ROKU stock during Thursday’s trading session at a much lower cost than the $263.46 per share that ARKK has averaged so far.

ROKU is ARKK’s fourth largest holdings, with ROKU accounting for 5.9% of ARKK’s holdings, and with ARKK holding nearly 4% of ROKU shares. 

ARKK isn’t the only one paying some extra attention to ROKU …

In the pits, ROKU’s open interest is at 113% of its typical levels, and much of this interest is call-skewed, with call open interest at 118% of its normal amounts, and with calls outnumbering puts 1.2-to-1.

However, two of the top three open interest contracts are puts. It seems traders have piled into the front-month 160-strike put, as well as the February 180-strike put. However, the February 180-strike calls are not far behind.

Currently, options traders are getting a bargain on their ROKU trades, with ROKU’s 30-day HV sitting well above its 30-day IV, indicating options traders are getting more movement than they are paying for.


Don’t Ignore Your Beta!

Hey Trader,

When markets are as unpredictable as they are today, it’s important to take a good, hard look at your trades, and make sure you’re not taking on any undue risk.

Now, you should always be aware of, and managing, your basic option Greeks … delta, theta, vega, and gamma.

But there’s a fifth Greek that doesn’t get as much time in the spotlight …

But is crucial nonetheless.

I’m talking about beta.

Managing your portfolio’s beta is crucial if you want to make sure you’re not overexposed to the whims of the broader market.

In order to do that, you need to have an understanding of what beta is, and why you don’t want your beta tipping too far in one direction or the other.

So what the heck is beta, anyway?

Beta is a measure of volatility. 

Specifically, beta measures a stock’s volatility as it compares to the volatility of the market – so a stock with a beta of 1 typically moves in sync with the broad market, while a stock with a  beta below one tends to be less volatile, and a beta over 1 indicates the stock is typically more volatile than the market.

If a stock has a beta of 1.5, that indicates it is 50% more volatile than the S&P 500 (Ticker: SPX).

So if the SPX moves 10%, we would expect to see that stock move 15%.

On the other hand, if something has a beta of 0.5, that indicates it is 50% less volatile than the SPX, so with a 10% move in the SPX, we would expect to see the stock in question move only 5%.

An option’s beta is the covariance (a statistical measure of how two variables move together) of the option’s return with the market return, divided by the variance of the market return.

It can be written as:

B = Covariance (Re, Rm)/Variance(Rm)

Where Re = stock return and Rm = market return.

Now, a high beta stock will outperform when the market is moving up, but it will underperform when the market is going down. 

With a low beta stock, you’ll see the opposite: low beta equities will typically underperform in a bull market, but will outperform in a bearish market.

And this is why managing your portfolio’s beta is so important to managing your directional risk.

When your portfolio’s beta is balanced … It can help ensure that if the market makes a big move in one direction or the other, you won’t suddenly find your trading account blown to smithereens.

Think about it … if you were all long calls in March 2020 … how do you think that would have worked out for you?

That’s an extreme example, but I think you get the point.

I try to always maintain a portfolio where I am long both calls and puts. 

Beta weighting your portfolio against an index can help you estimate your portfolio’s exposure to a major move in the market. Many traders use the S&P 500 (Ticker: SPX) as a benchmark, but you can use other indices such as the Nasdaq 100 (Ticker: NDX), Russell 200 (Ticker; RUT), or even the beta of a specific sector.

When you have a relatively balanced portfolio (notice that doesn’t necessarily mean a 50/50 split between puts and calls, as a truly balanced portfolio will be dependent on the beta of your positions), you can effectively remove your beta bias in either direction.

As we anticipate turbulence in the months ahead, learning to manage your position’s beta will become increasingly important to making sure your portfolio isn't completely at the mercy of the market.

Your Only Option,

Mark Sebastian

Until This Happens, The Market Will Stay Sick

The Option Pit VIX Traffic Light is Red: Volatility Is Likely to Drop.

Hey Traders,

Thursday was a bit of a blood bath, and Friday has some follow through.

But what is causing this selling? Why are we threatening 4,600 again in the S&P 500 (Ticker: SPX)?

And what does this mean for VIX?

Earnings season is upon us.

We saw some strength in the airlines on Thursday, though then that quickly evaporated.

The first of the big banks has reported … and it is not good.

So is that the reason the VIX is over 20?

No.

The answer continues to lie in the Nasdaq 100 (Ticker: NDX) and in ARK Innovation ETF (Ticker: ARKK) funds.

Compare the returns of ARKK (red) vs the Invesco QQQ Trust (Ticker: QQQ) over the last three months:

ARKK has taken a nosedive, while the QQQ is actually flattish.

Why?

Megacaps.

Here is QQQ (red) vs Apple (Ticker: AAPL):

Think of ARKK as being the non-megacap portion of the QQQ, and AAPL as a representation of the megacaps.

Underneath the flattish QQQ over the last three months, there is a lot of softness.

Remember, the non-megacaps represent about 52% of the QQQ value, but account for 93 of the 100 stocks in NDX.

Until ARKK recovers, the market is going to be sick.

That said, on a day we are down about 40 points in SPX, the VIX is not really reacting, and VIX futures are not really moving much.

Over the next day or two, we could be in line for an UGLY move in VIX, but it could be the final flush out in ARKK that causes that.

Once ARKK bottoms, the market might be in a position to begin a move higher.

Your Only Option,

Mark Sebastian

ARKK Is At It Again… And VIX ETPs Are Noticing

Sample TextThe Option Pit VIX Traffic Light is Red: Volatility Is Likely to Drop.

Hey Traders,

On Wednesday, the VIX dropped below 18.

But unlike the last few days, iPath S&P 500 VIX Short-Term Futures ETN (Ticker: VXX) and ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) did not get destroyed. In fact, they only lost about the typical daily decay.

What is going on?

The answer: February futures did not drop today.

In fact, they were up:

While January futures were down, February ticked up.

What is the cause?

The answer rhymes with “Markk” …

When ARK Innovation ETF (Ticker: ARKK) funds dropped, the VIX came to life, and the futures noticed:

Unlike the VIX itself, futures never receded after the ARKK dump.

What we are seeing is the mega-caps cover up for a weak Nasdaq.

Remember, almost 50% of the Invesco QQQ Trust (Ticker: QQQ) is made up of just seven stocks.

Those seven were mostly strong on Wednesday …

The rest of the QQQ?

Well, it looks like ARKK.

So how do I play it?

I think an ARKK put spread, paired with either long calls or short puts in the QQQ, could pay nicely.

Your Only Option,

Mark Sebastian


How Is This VIX ETP Hitting New Lows?!

The Option Pit VIX Traffic Light is Red: Volatility Is Likely to Drop.

Hey Traders,

The VIX sold off again on Tuesday.

But if you were not paying attention you would have missed what happened in ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY).

UVXY hit a new all-time low on Tuesday …

But how can this happen when VIX is 18.40, up from a week ago?

The UVXY hit its new all-time low on Tuesday after trading at 11.67 at the close.

Interestingly, VIX is a full two points higher than it was only a week ago.

Check it out:

How is this possible?

Remember, the UVXY is derived from the VIX futures, not the VIX itself.

Since last week, we have gotten closer to January VIX expiration.

In that time, January VIX futures are flat, and February futures – which account for an increasingly large proportion of UVXY’s holdings – are down:

Thus, even though VIX is up, with the futures down, and UVXY levered at 1.5 times VIX futures,  UVXY is down.

Now … imagine what will happen if the VIX gets back to 16 …

Where does that put UVXY?

The answer is A LOT lower than you probably think it can go.

So what is a trader to do?

You know I think the Jan. 21 10-strike puts are too cheap (they could legitimately turn into a $1.00).

But also check out the Jan. 21 11.5-strike puts. They are only $0.75…

UVXY was down about $0.70 on Tuesday.

One or two more days of vol crush, and UVXY could easily make a run at sub-11.

Your Only Option,

Mark Sebastian


2 ETFs To Hold In 2022

Hey Traders,

After years of historic returns in the S&P 500 (Ticker: SPX) … +29% in 2019, +16% in 2020, and +27% in 2021 …

This is what we’ve seen so far in 2022 … during a time of year when markets have historically rallied:

So what should you do?

While I’m not suggesting you deviate from your long-term investment plans …

There are two indexes in particular that I like for the year ahead.

What are they?

DIAmond In The Rough

The first one you may have heard me talk about quite a bit over the last few months … especially since we saw the omicron/ARK Innovation ETF (Ticker: ARKK) meltdown.

I think as we see the Fed step up its battle to slow the ballooning rates of inflation, the Dow Jones Industrial Average (DJIA) will be the index that benefits the most.

Specifically, I like the SPDR Dow Jones Industrial Average ETF (Ticker: DIA) as a way of gaining exposure to the moves of the Dow.

The DIA returned just under 21% in 2021, but in the year ahead, I think it is poised to outperform.

Why the Dow/DIA?

Well, let’s go over a few basics about the Dow …

The Dow Jones Industrial Average was originally composed of 12 stocks, primarily in the industrial sector. 

Now, the DJIA is made up of 30 components, all “blue chip” names that are among the biggest companies in the U.S., and that typically see stable earnings. The great thing about the Dow is that, while it’s no longer solely composed of names in the industrial sector, its blue-chip components are relatively stable. For example, it’s biggest components are currently UnitedHealth Group (Ticker: UNH), Goldman Sachs Group (Ticker: GS) and Home Depot (Ticker: HD). 

Yes, it includes tech giants like Apple (Ticker: AAPL) and Microsoft (Ticker: MSFT), but it also contains plenty of names that are less vulnerable to inflation, like consumer goods heavyweights Procter & Gamble (Ticker: PG) and Johnson & Johnson (Ticker: JNJ).

The index is price weighted, so each component is weighted by its current share price, rather than market cap weighted, like the SPX, or equal weighted. This means that while the big tech names like AAPL and MSFT are included in the Dow, the index isn’t as heavily skewed to reflect their performance as, say, the Invesco QQQ Trust (Ticker: QQQ) or SPX.

Therefore, as we see growth stocks hit by rising interest rates, the Dow, and by extension, DIA, will be able to dodge some of the headwinds.

Remember, market breadth has been horrible for most of 2021. Yes, we saw a huge +27% gain in the S&P 500 … but just five stocks – Apple (Ticker: AAPL), Microsoft (Ticker: MSFT), NVIDIA (Ticker: NVDA), Tesla (Ticker: TSLA) and Alphabet (Ticker: GOOGL) accounted for about half of the indexes gain from April onwards …

Leaving the remaining 495 companies responsible for the other half …

A less tech-heavy index with good exposure to inflation-resistant names like energy, industrials, and consumer goods, is more likely to see outsized gains in the current economic climate, and in the face of rising interest rates, compared to tech-heavy indexes, which I think will struggle over the year ahead.

A RSP For Success

Maybe you’re not so keen to shun the tech heavyweights that have powered your portfolio to historic highs over the last year …

I get it.

So how about an ETF that lets you maintain your SPX exposure …

Without the massive FAANG tilt?

If that sounds like something you’d be into …

Check out the Invesco S&P 500 Equal Weight ETF (Ticker: RSP) – my other top ETF pick for the year ahead, which delivered a 29.4% return in 2021.

The RSP is an equal-weighted ETF that holds the same components as the SPX, but rather than weighting each component based on market cap, it weights its holdings equally to all of the SPX’s 500 components. 

This is a huge difference to the SPX itself. For example, AAPL, MSFT, and Amazon (Ticker: AMZN) are just three of 500 SPX components … but they account for more than 16% of its portfolio.

Meanwhile, names like Penn National Gaming (Ticker: PENN) and Alaska Air Group (Ticker: ALK) account for less than 0.02% each. Gap (Ticker: GPS) is weighted just 0.009%!

With RSP, you maintain exposure to all 500 companies (in total 505 components) in equal amounts, and the ETF is rebalanced quarterly.

So if you’re not quite ready to say “au revoir!” to your AMZN, NVDA, and TSLA exposure …

RSP might be exactly what you need.

And that’s why it makes my list of top two indexes to hold in 2022.

Like I said, I’m not telling you to rebalance your retirement fund, or shun growth stock exposure entirely (ahem, RSP!)

But if you’re looking for some medium-term buy-and-hold index exposure …

In my opinion, these two have the best chance of delivering steady gains in the year ahead.

Your Only Option,

Mark Sebastian

Here’s What’s Driving These Wild VIX Moves

The Option Pit VIX Traffic Light Is Yellow: Expect Wild Moves.

Hey Traders,

If you just looked at the closing price of VIX, you probably would have thought that the light turning yellow was wrong.

But on Monday, the VIX made a wild move.

It started the day WAY up, and ended the day pretty much flat (adjusted for the weekend).

The VIX had a huge intraday range on Monday…

VIX got over 23, only to end the day near 19.

That is a pretty wild day!

The big driver?

The Nasdaq 100 (Ticker: NDX).

The NDX, which has clearly been the driver behind VIX that last few weeks, had a massive midday turnaround on Monday:

For at least a day or two, the bottom might be in the NDX (and Invesco QQQ Trust (Ticker: QQQ)).

We could see a pretty strong short squeeze and a drive lower in VIX back toward 17.

This will likely put ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) below 11.

VIX is 19.4, up from under 17 on January 4th. In that time, UVXY is up just 0.48.

I would be a buyer of the UVXY Jan. 12-strike puts and the Jan.28 12-strike puts as well.

I think they will likely pay, if bought early, a decent amount by the end of the day.

Your Only Option,

Mark Sebastian

Here’s How To Play This Yellow Light

The Option Pit VIX Traffic Light Is Yellow: Volatility Could Make Some Wild Moves.

Hey Traders,

The VIX Light is yellow … barely.

Volatility could make some wild moves.

Monday’s VIX pop was enough to push the light back to yellow.

We have a really strong VVIX (VIX of VIX) and a VIX back over 20.

So what now?

The VIX Traffic Light turning from red to yellow does not mean the VIX is going to 30.

It means the VIX could go to 30, but it could also go right back down to 17.

We are now looking for wild moves.

The VIX futures curve is still in a small contango for now:

But we are now in a position to potentially get some small backwardation in the near-term.

That said, we are going to need a serious second leg down to get there.

So how do I play this yellow light?

In this case I want to do a call spread with a put.

The January 25/32.5-strike call spread costs about $0.90.

The 20-strike puts cost $0.75.

At $1.65, I can make good money buying the call spread and the puts one-to-one.

Your Only Option,

Mark Sebasitan

Are Crypto Pits Shaking Off The Fed?

Genesis Volatility provides incredible analysis and a deeper look into the technical aspects of cryptocurrencies and crypto options. With crypto remaining a hot topic for traders of all types in today’s market, we’ve partnered with Genesis to provide their weekly insight to Pit Report subscribers.

Hey Traders,

The equities markets weren’t the only thing hit by Fed hawkishness …

Crypto and crypto options paid their dues as well, with options skews severely reversed, though for Bitcoin at least, both at-the-money implied volatility (IV) and realized volatility (RV) came through surprisingly unscathed.

But … could a bottom be in place? One big dollar options close-out suggests it might be for one crypto…

While another seems to be losing its confidence.

Which crypto big shot is shaking off the Fed, and which seems to be shaking in its boots?

Find out below!

Originally posted on Genesis Volatility

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$41,895

DVOL: Deribit’s volatility index

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(1 month, hourly)

SKEWS

(Jan. 9th, 2022 – Short-term and Medium-term BTC Skews – Deribit)

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We went into this week with skews that were bid to the calls and lower overall implied volatility (IV) levels.

Tuesday, everything shifted as the US Fed hawkishness proved itself to definitely be in play.

Now option skews have reversed severely and puts are bid beyond levels seen in mid-December.

Weekly skew is the most bearish and provides some opportunity for a trader’s betting on a “Snap-Back” rally. Medium-term options are slightly negative, while the longer-dated skew remains buoyant enough to be above par.

(Jan. 9th, 2022 – Long-Dated BTC Skews – Deribit)

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TERM STRUCTURE

(Jan. 9th, 2022 – BTC’s Term Structure – Deribit)

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Despite the harsh spot-selling seen this week, the IV term-structure is nearly identical to last week.

The overall trend of lower IV seen this month has continued despite a brief flattening rally which was quickly faded.

ATM/SKEW

(Jan. 9th, 2022 – BTC ATM & Skews for options 10-60 days out – Deribit)

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ATM IV (left) barely managed to tick higher. Overall, this activity is surprising as a continuation in spot-price selling could birth much higher RV, like we’ve seen many times before in crypto.

SKEW (right) continues to be quick to react to the markets, more so than overall IV. We can see that skew had a large range this past month and this week’s reaction is logical.

Open Interest – @fb_gravitysucks

BTC

This was the first expiry of the new year and open interest was greater than 20k contracts. This has been one of the most traded “weekly contract” expirations in the last three months. Most traders were positioned for a move higher by being long gamma; spot pointed in the other direction and premium was paid only to put holders.

(Jan 7th , 2022 – BTC Open interest – Deribit)

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(Jan7th , 2022 – BTC Dollar premium – Deribit)

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On 5th January 60k strike took a lot of attention: difficult to say with certainty if this is a bullish forward-trade or some more sophisticated volatility one. 

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With spot prices around $45k, an active player hedged/speculated buying 14JAN 44k puts. Terrific timing. Positions have been closed (took profit) on Saturday 8th: good sign for a bottom in place.

(3rd Jan – 9th Jan, 2022 – Options scanner – BTC)

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For more insights, follow veteran crypto options trader Fabio on twitter @fb_gravitysucks

VOLUME

(Jan. 9th, 2022 – BTC Premium Traded – Deribit)

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(Jan. 9th, 2022 – BTC’s Contracts Traded – Deribit)

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Paradigm Block Insights (Jan 3 to Jan 9) – Patrick Chu

Risk sentiment soured upon the release of FOMC meeting minutes, which flagged chances of faster rate hikes and balance sheet shrinkage. Prices fell across the board.

We saw a greater share of BTC volume pre-FOMC minutes release, before ETH printed more than twice the volume of BTC after release.

(Jan 3 to Jan 9 – Volume Profile – Deribit & Paradigm)

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BTC DVOL saw a blip higher from 71 IV to 78 IV on 05 Jan after the minutes, but traded back down on the days after.

Put/Call ratio in BTC this week was more even at 0.90 (52.6% were calls) driven by protection buying.

(Jan 3 to Jan 9 – Put & Call vertical as % of trade “count” – Deribit & Paradigm)

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Feel free to contact us at https://t.me/tradeparadigm & follow us at @tradeparadigm on Twitter to access the best pricing and liquidity for large trades in crypto derivatives.

VOLATILITY CONE

(Jan. 9th, 2022 – BTC’s Volatility Cone)

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Interesting to note, the current selling seen this week wasn’t erratic enough to even get weekly realized volatility (RV) back above the median.

On a gut level, this is a surprising RV profile compared to PnL returns.

REALIZED & IMPLIED

(Jan. 9th, 2022 – BTC’s 10-day Realized-, and Trade-Weighted-, Implied-Vol.-Deribit)

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In order for IV and RV to meet this week, IV had to actually drop while RV rallied higher.

This vol activity displays how much of persistent premium IV displayed going back to the second half of 2021. RV rarely traded above IV, which would normally make up for the common IV premiums.

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$3,157

DVOL: Deribit’s volatility index

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(1 month, hourly)

SKEWS

(Jan. 9th, 2022 – ETH’s Skews – Deribit)

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ETH skews had a more erratic drop than BTC skews and the damage is actually deeper.

The skew profile is negative for maturities all the way through 180-days.

Weekly skew is the most negative but 30-day skew is sitting at nearly identical levels.

The “Snap-back rally” risk-reversal play could be executed with 30-day options here. A trade that becomes even more interesting given the strong ETH/BTC context.

(Jan. 9th, 2022 – ETH’s Skews – Deribit)

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TERM STRUCTURE

(Jan. 9th, 2022 – ETH’s Term Structure – Deribit)

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Similarly, the ETH term structure is nearly identical this week compared to last week, with a small exception of flattening for the very short-dated options.

Medium-term and long-term IV barely reacted to this week’s activity.

ATM/SKEW

(Jan. 9th, 2022 – ETH’s ATM & Skews for options 10-60 days out – Deribit)

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ATM IV (left) is below holiday season IV (when nothing happened). Interesting to see that option appetite only materialized in skew but not in overall IV.

Skew (right) reacted very logically and persistently sold-off. We are right back at monthly lows.

Open Interest – @fb_gravitysucks

ETH

This was a disappointing first 2022 expiry. Only 115k contracts of open interest expired which has been on the lower-end for the past two months. This is the opposite compared to Bitcoin.

The open interest profile showed a more cautious tone with a higher put/call ratio. Sell-off was rewarded to puts holders.

(Jan 7th , 2022 – ETH Open interest– Deribit)

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(Jan 7th , 2022 – ETH Dollar premium – Deribit)

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Bearish flow in advance of the price drop: 25MAR risk/reversal 3k-6k and 14JAN puts.

ETH lost some confidence it showed in the last months. With beta>1 and IV almost at par with BTC, hedgers are eager to buy some cheap protections.

(3rd Jan – 9th Jan, 2022 – Options scanner – ETH)

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For more insights, follow veteran crypto options trader Fabio on twitter @fb_gravitysucks

VOLUME 

(Jan. 9th, 2022 – ETH’s Premium Traded – Deribit)

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(Jan. 9th, 2022 – ETH’s Contracts Traded – Deribit)

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ETH option volumes are holding relatively steady.

Paradigm Block Insights (Jan 3 to Jan 9) – Patrick Chu

The dominant activity we saw in ETH this week was sellers of Skew via RR Puts and Call Spreads. We saw the greatest activity in 3000 (41,043x) and 4000 (38,428x) strikes across Jan-Jun tenors.

ETH volumes averaged 250MM on 6th & 7th Jan.

(Jan 3 to Jan 9 – Volume Profile – Deribit & Paradigm)

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(Jan 3 to Jan 9 – Put & Call vertical as % of trade “count” – Deribit & Paradigm)

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Feel free to contact us at https://t.me/tradeparadigm & follow us at @tradeparadigm on Twitter to access the best pricing and liquidity for large trades in crypto derivatives.

VOLATILITY CONE

(Jan. 9th, 2022 – ETH’s Volatility Cone)

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ETH RV was strong enough to get above the median, but longer measurement windows display meager readings with some sitting on annual lows.

REALIZED & IMPLIED

(Jan. 9th, 2022 – ETH’s 10-day Realized -, and Trade-Weighted-, ImpliedVol.-Deribit)

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RV is peering above IV, closing the gap seen since the second half of December.

I Like Big Banks

Hey Traders,

The secret is out …

I like big banks and I cannot lie!

Financials have had a booming start to the year, fuelled higher by the hawkish Fed and higher bond yields.

And the pits are certainly not letting it go unnoticed …

These three tickers in particular caught my eye this week.

Financial Select Sector SPDR Fund (Ticker: XLF):

Before we dig into individual names, let’s take a look at XLF, which tracks the financial sector as a whole.

As you might expect, XLF has had a strong start to the year. While the shares closed at $39.05 on December 31, 2021, just one week later, XLF closed out the first trading week of the year at $41.17, an all-time high.

That’s a solid week-over-week gain of 5.5%, on a week that saw most of the broader market finish in the red.

The shares are now well above their 50-day moving average, which previously served as resistance several times during the month of December.

With no nearby overhead resistance, XLF seems to have plenty of room to run higher in the months ahead.

But what do the pits think?

Well, XLF options are cheap right now, with XLF’s implied volatility (IV) in the bottom 10% of its range.

However, XLF’s 30-day historical volatility (HV) is sitting just off its annual high, suggesting XLF has been moving more than usual.

While historical volatility and implied volatility are at nearly opposite ends of their own annual ranges, in reality, HV (lavender) only sits a bit over IV (red), in terms of points.

Of course, that didn’t stop XLF pits from getting hammered on Friday, with trading volume at more than 148% of its average daily amount. This heavy trading volume fell mostly on the call side, with 3.5 calls brought to open for every put.

This is actually rather unusual to see in XLF’s pits, which lately has seen put open interest outnumber calls at a ratio of 1.8-to-1.

In particular, traders are targeting the June 30-strike put, with 114,125 contracts open, followed by the January 37-strike put, with 102,454 contracts open. The most populated call contract is only the sixth highest open interest, with 76,509 contracts of the February 42-strike call currently outstanding.

Of course, with call open interest in only the ninth percentile of its annual range, that isn’t necessarily surprising.

Are the bulls finally going to come back to XLF’s pits?

If Friday’s heavy call flow was anything to judge by, XLF might be getting ready to welcome them back home …

Wells Fargo & Co. (Ticker: WFC):

Like XLF, WFC hit the ground running to launch its 2022. WFC closed out the final trading session of 2021 at $47.98, and climbed more than 14% to close out the first week of trading in the new year at $54.77, a four-year high.

In addition to general bullish tailwinds pumping up the financial sector, WFC also enjoyed an upgrade from an analyst at Barclays to “outperform” from “equal weight.” At the same time, the analyst increased WFC’s price target to $62, representing healthy potential upside even after this week’s strong performance.

I also noticed some bullish Big Money attention targeting the banking stock, which I noted to my Big Money Flow members.

During the first half of the week, one deep-pockets trader opened 11,000 contracts of the February 55/60-strike call spread, and I’m thinking they’re pretty happy with the way things have played out so far …

While their initial spreads were opened for a total cost of $0.95, that same spread at the close on Friday would have cost $1.56.

And broader bullish attention was also evident during Friday’s trading session, which saw 271% of WFC’s typical daily call volume cross the tape, outnumbering puts more than 3-to-1.

WFC’s open interest is also higher than usual, though calls hold a smaller-than-normal lead over put open interest at 1.1-to-1 (compared to the typical 1.7-to-1).

These traders may be taking advantage of WFC’s low 30-day IV (red), which sits in only the 30th percentile of its annual range. Meanwhile, the 30-day HV (lavender) sits in the 80th percentile, and as you can tell by the chart below, WFC traders have been getting more movement than they’ve been paying for.

Bank of America (Ticker: BAC):

Sticking with the theme, BAC came out of the gates racing this week, tacking on more than 10% from its December 31 close through the end of this week. The shares finished on Friday at $49.18, which happens to be a new all-time high for the stock.

The bank stock also received several accolades, including being named as one of Wells Fargo Equity Research’s top picks for 2022, though mixed analyst attention may have cut down some of the crowd enthusiasm.

Like WFC, BAC options traders have been getting a relative bang for their buck, with 30-day historic volatility (lavender) outpacing 30-day implied volatility (IV).

And it looks like traders are happy to take advantage of BAC options being “on sale.”

Friday saw BAC’s pits do more than 287% of their average daily volume, and calls outpaced puts 4.3-to-1.

That’s huge in a name that typically sees put and call open interest sitting about equal!

All three of BAC’s top open interest positions are calls, including the January 2023 50-strike call with 149,327 contracts outstanding, followed by the January 2022 45-strike and January 2022 50-strike calls with 111,742 and 103,745 contracts open, respectively.

BAC bulls are likely cheering this week’s price movement, and will be looking to see if the sector momentum can keep up through second week of trading this year.

Your Only Option,

Mark Sebastian