Is The Crypto Melt-Down Hitting The Pits?

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,

With as much of a walloping the stock market is taking …

The crypto market might have it even worse, with heavyweights Bitcoin (BTC) and Ethereum (ETH) both down more than 50% from their all-time highs, and breaking below key support levels.

So in times like these … we look to the pits to see what options traders think!

 In BTC’s pits, last week’s expiration had the lowest volume seen in months, with only 13,000 contracts. However, skillful traders are playing the Greeks, and choosing straddle/strangle plays to rake in their profits.

And with the hard crypto sell-off, option skew has been repriced significantly lower … and could be providing potential for a “snap-back rally” volatility play. 

ETH traders are taking a slightly different approach, with call spreads most in vogue, as well as a few large risk reversal plays that are worth taking note of …

Here’s the latest on what’s happening in the crypto pits.

Originally posted on Genesis Volatility.

Receive Genesis Volatility’s insight straight to your inbox twice each week by signing up for their free newsletter right here: https://genesisvolatility.substack.com/

DeFi Options

DOVs

One of the recent themes in the crypto options market is structural short volatility flow via “DOVs” (DeFi Option Vaults).

Protocols such as Ribbon (RBN), Friktion (FRIK), Atomic.finance and Thetanuts allow crypto holders to allocate holdings to structured products that perpetually use the capital to sell covered calls and cash secured puts on Solana, Bitcoin and EVM chains respectively.

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Top Trades this week include:

RBN – AVAX 1/28 95 C = ~ $17m (Notional)

RBN – ETH 1/28 2500 P = ~ $67m (Notional)

RBN – ETH 1/28 3200 & 3300 C = ~ $82m (Notional)

RBN – BTC 1/28 44k C = ~ $1.7m (Notional)

RBN – AAVE 1/28 44k C = ~ $28m (Notional)

FRIK – SOL $160 1/28 C = ~ $22m (Notional)

FRIK – BTC $45k 1/28 C = ~ $16.2m (Notional)

FRIK – SOL $100 1/28 P = ~$15.5m (Notional)

Thetanuts ETH Chain – Luna/WBTC/Talgo/WETH Puts = ~ $11m (Notional)

Thetanuts ETH Chain – WBTC/Talgo/WETH Calls = ~ $26m (Notional)

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$36,311

DVOL: Deribit’s volatility index

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(1 month, hourly)

SKEWS

(Jan. 23rd, 2022 – Short-term and Medium-term BTC Skews – Deribit)

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Crypto assets, along with US equities had a turbulent end of week.

Bitcoin spot prices are down 17% since last week.

This has caused implied volatility to rise while skew repriced significantly lower (led by short-term expirations).

Weekly option skew is now -10pts, after briefly approaching -20pts.

30-day option skew is about -8pts and even long-dated 180-day option skew are negative.

Big bearish sell-offs can often overshoot and invite short-term bounces. Very negative weekly option skew could provide “snap back rally” volatility plays.

Something to keep an eye for.

(Jan. 23rd, 2022 – Long-Dated BTC Skews – Deribit)

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TERM STRUCTURE

(Jan. 23rd, 2022 – BTC’s Term Structure – Deribit)

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Notice the term structure week-over-week has lifted-off higher in the front-end.

The time series chart below shows a flat/backward term structure sustaining its shape.

The recent past has seen term structure flattening, only to be quickly faded back lower; today we’re in day 3 of a flat term structure… sustainability we haven’t seen in a while.

ATM/SKEW

(Jan. 23rd, 2022 – BTC ATM & Skews for options 10-60 days out – Deribit)

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ATM IV (left) is right back near monthly highs. IV has retraced all mid-month selling.

SKEW (right) has had a devastating drop lower, but was likely overshot. As mentioned before, big dips like this can be met with aggressive buying as many traders have been sidelined during BTC rally.

Aggressive dip buyers can quickly turn volatility skew trades profitable.

Open Interest – @fb_gravitysucks

BTC

This weekly expiration was the perfect representation of market sentiment and subdued volume continuation, with only 13k contracts (one of the lowest values seen in months) and a big sell-off in the morning of expiration. Bears got their premium. Calls sold and puts bought has been the winning strategy.

Around 77% of contracts expired worthless.

(Jan 21th , 2022 – BTC Open interest – Deribit)

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(Jan 21th , 2022 – BTC Dollar premium – Deribit)

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TOP TRADES

With BTC price stuck around $42k for most of the week, and the sell-off move only on Friday/Saturday, trades had two way interest.

The first part of the week had “theta collecting strategies”: a disillusioned trader put on a calendar betting on a price range between $39k-$43k. Almost $50k theta per day at inception.

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With prices losing some grip, a trader placed a strangle to be exposed to both Vega and Gamma without any bias about direction. Perfect timing.

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On Friday morning with prices under the psychological level of $40k, a skillful trader took profit on $45k strike puts and then rolled down positions with a positive net premium.

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After the first leg down to $38k, a bullish participant bought a bull call spread 300x for June expiration. This is the equivalent to “buy the dip” in options space.

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

VOLUME

(Jan. 23rd, 2022 – BTC Premium Traded – Deribit)

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(Jan. 23rd, 2022 – BTC’s Contracts Traded – Deribit)

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Paradigm Block Insights (Jan 17 to Jan 23) – Patrick Chu

As market sentiment turned sour, BTC & ETH broke the key 39,000/2,900 support levels – the short end of the term structure which had been suppressed by DOV selling spiked higher as the curve flattened in both BTC & ETH.

In both BTC & ETH, IV moved aggressively higher with 1W vol jumping from 53 to 82 in BTC & 60 to 102 in ETH. Skew also moved in favor of puts, with 25D’s dropping as low as -17 in ETH and -12 in BTC before normalizing into the weekend.

(Jan 17 to Jan 23 – Volume Profile – Deribit & Paradigm)

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Interestingly, the back end of the curve remained calm given the movements in spot with IV for tenors beyond 1M jumping only 5-7 handles in BTC & ETH, highlighting the structural offer that remains with market supply in overhang.

In BTC this week, the largest volumes came from two-way interest on strangles/straddles, call spreads & outrights. 28Jan 36k/40k and 4Feb 36k/40k were the most popular strangles, while call calendars rolling positions from Jan/Feb to Mar especially on the 40k strike dominated volumes.

For outright puts on the 21Jan, 28Jan & 25Mar, expiries with strikes between 30k and 38k were popular; puts accounted for almost 40% of total trading volumes.

(Jan 17 to Jan 23 – 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. 23rd, 2022 – BTC’s Volatility Cone)

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RV saw significant liftoff, but the volatility cone keeps things in perspective.

Current RV measurements aren’t even over the 75th percentile.

BTC can easily move even more erratically, a good context for vol. traders.

REALIZED & IMPLIED

(Jan. 23rd, 2022 – BTC’s 10-day Realized-, and Trade-Weighted-, Implied-Vol.-Deribit)

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RV liftoff was met with similar liftoff in the IV space.

Although the IV move felt large, we’re merely back to the summer 2021 ATM IV VWAP range.

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$2,537

DVOL: Deribit’s volatility index

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(1 month, hourly)

SKEWS

(Jan. 23rd, 2022 – ETH’s Skews – Deribit)

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ETH option skew has seen an even more erratic weekly expiration, reaching nearly -30pts.

30-day options are about -10pts while longer term (180-day) skews are hovering near at par.

(Jan. 23rd, 2022 – ETH’s Skews – Deribit)

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TERM STRUCTURE

(Jan. 23rd, 2022 – ETH’s Term Structure – Deribit)

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The ETH term structure is significantly higher week-over-week.

The move higher was led by the short-end, but the longer-term stuff also saw a parallel shift higher.

Like with BTC, we’re seeing a sustained flat/backward term structure.

Interesting to note: the slight pullback in IV on Jan 21 near the DOV auction schedule… although it’s hard to jump to any conclusions, given the nature of erratic moves like this.

ATM/SKEW

(Jan. 23rd, 2022 – ETH’s ATM & Skews for options 10-60 days out – Deribit)

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ATM IV (left) is right back to monthly highs (yet not exceeding them).

Skew (right) is showing a holding pattern near the lows for these select expirations.

Open Interest – @fb_gravitysucks

ETH

This weekly expiration was in line with recent averages with around 136k contracts, 78% of whom expired worthless. The same considerations seen for Bitcoin apply here: volumes subdued, two-way interest for puts and calls sold. Bears in control got paid.

(Jan 21th , 2022 – ETH Open interest– Deribit)

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(Jan 21th , 2022 – ETH Dollar premium – Deribit)

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TOP TRADES

Participants have lost some interest in ETH trades. Talking for months about the flippening of the market cap and the flippening of options volumes has been a curse at this point.

Nevertheless, some interesting trades hit the tape.

With prices above the $3k support level, an experienced trader bought the bounce with a sort of risk-reversal, selling 3k puts and buying 7k calls, with protection for gamma/vega exposure risk in 1.5k strike.

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After the break down of 3k support level, a participant bought 6500 bull call spreads for June. As is often the case with prices near the marks, the direction of trade labels have been reversed. 

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

VOLUME 

(Jan. 23rd, 2022 – ETH’s Premium Traded – Deribit)

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(Jan. 23rd, 2022 – ETH’s Contracts Traded – Deribit)

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ETH option volumes are holding relatively steady.

Paradigm Block Insights (Jan 17 to Jan 23) – Patrick Chu

In ETH this week, the market dropped; we saw strong interest in topside call spreads, most notably 24 Jun 1×2 10000C/20000C, which traded 10500x by 21000x, dominating volumes.

We also saw significant interest for 24 Jun 3000/5000 call spreads towards the end of the week.

Other notable interests this week that traded significant volumes included the 28Jan 3000P/2700P put spread, as well as the 25Mar 2000C/5000P risk reversals, as market sentiment remained resilient in face of weakness.

(Jan 17 to Jan 23 – Volume Profile – Deribit & Paradigm)

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(Jan 17 to Jan 23 – 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. 23rd, 2022 – ETH’s Volatility Cone)

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ETH RV actually exceeds the 75th percentile for the weekly measurement window.

REALIZED & IMPLIED

(Jan. 23rd, 2022 – ETH’s 10-day Realized -, and Trade-Weighted-, ImpliedVol.-Deribit)

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ETH RV is exceeding IV, even despite IV coming in higher week-over-week.

As we noted last week, the ETH / BTC IV gap has shrunk significantly… Combine the relative vol with the RV/IV discount… Long ETH volatility could still be interesting given the right structure.


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When Being Neutral Is The Best Trading Policy

Hey Traders,

You have almost certainly heard of delta … the option Greek that tells you how much the price of an option will move with a $1 change in the underlying.

But my Big Money Flow members have heard me talk a lot about trades that are delta neutral.

Trading delta neutral involves active trade management … but it is something many Big Money traders engage in.

Why? How does it benefit them?

What the heck is delta neutral, anyways?

Let’s take a look.

Neutral Party

Before we dig into neutralizing delta, let’s go over a quick review of what delta actually is.

Simply put, an option’s delta tells you how much the price of an option will move for every $1 change in the underlying. 

Call options have deltas between 0.00 and 1.00, while put deltas range from -1.00 to 0.00. 

Typically, at-the-money options have deltas near 0.5, or -.50. The farther in-the-money you go, the delta moves closer to 1.00 (or -1.00).

So if you have a call option on DIS with a delta of 0.50, if DIS share price rises $1, the value of your option should increase by $0.50.

If you have a DIS put option with a delta of -0.50, then your put option will lose $0.50 if DIS rallies $1, but will gain value if DIS falls.

Now, delta represents directional risk – because your position will gain or lose value depending on the direction of the underlying.

Trading delta neutral is when you want to reduce your directional risk by adding an opposing position that brings the total delta closer to zero.

This is something that is often done by professional traders, like market makers or institutional investors. It requires active management of your positions, because an option’s delta is constantly changing.

How does this actually work?

Say you are long 10 contracts of DIS calls with a delta of 0.50. To calculate the overall delta exposure, you would multiply the delta 0.50 * 100 (shares per contract) * 10 (number of contracts).

This would give you an overall delta of 500. So for every $1 DIS moves, your position would gain (or lose) $500.

But say you want to reduce your directional risk (we will talk about some of the reasons why you may want to do this in a minute), and make your position delta neutral.

How do you do this?

Well, since the position has positive delta, you can hedge with positions that will have negative delta. For example, you could buy long puts (or open a long put spread), short calls (or even a short call spread), or short stock. Shares of an underlying always have a delta of 1, so buying long stock will increase your delta by 1, while shorting stock will decrease your delta by 1.

In this case, with a delta of +500, you could short 500 DIS shares to bring your total position to delta neutral.

Let’s say your original position was puts, and your original delta was -500. In this case, you could buy long stock, or buy calls or short puts to bring in positive delta, and move your overall delta risk closer to 0.

So, we have established that being delta neutral reduces your directional risk.

But why would you want to do this?

Well, traders such as market makers and other institutional investors may have different goals with their trading. For example, market makers may want to profit from buying cheap options and selling more expensive options, so their goal is not so much to profit off of price changes in the underlying. Therefore reducing their directional risk is in line with their goals.

If you can hedge out the directionality of an option, then you are limiting your risk exposure to other factors in the options pricing model, such as time decay (theta) and volatility (vega).

So for example, let’s say you think volatility in DIS will go up, but you don’t want directional exposure to the stock. By trading delta neutral, you can profit from increasing volatility without taking on a bunch of directional risk.

Alternatively, delta-neutral hedging can help protect your portfolio against price fluctuations in a stock. So if you are bullish on a stock in the long-term, but concerned about near-term price action, a delta neutral strategy is one way to help protect against downside.

The downside to this of course is that you are limiting your profit potential by neutralizing your delta … but you are also limiting your potential losses, so there is a trade-off in both directions.

Let’s take a look at a real-world example.

Here is a Big Money trade on DraftKings (Ticker: DKNG) that crossed the tape on Friday, as DKNG was trading around $20.10 …

This trader purchased 27,000 contracts of the April 20-strike put for $3.18, and sold the same number of 25-strike call contracts for $1.61. 

This trade is known as a risk reversal, and what they did here was essentially create a synthetic short.

Does this mean they are bearish? No. 

Instead, this seems to be someone who wants to get long, and who is collaring that position to reduce their risk.

This trade had a -0.78 delta, and this trader now holds 27,000 contracts.

What does that make the total delta exposure here?

-0.78 * 100 * 27,000 = -2,106,000

So to make this position delta neutral, you would need to buy 2,106,000 DKNG shares.

And wouldn’t you know it …

At the same time this trade went through, a block of 2,106,000 DKNG shares crossed the tape, too!

Now this trader is able to hold their long DKNG shares, but if DKNG happens to struggle in the near-term (which, if you take a look at its recent chart, is not out of the question …) …

This trader won’t be losing $2,106,000 of value for every dollar DKNG drops (although the sold calls do limit potential upside).

Like I mentioned, delta hedging does take a lot of hands-on management to successfully pull off, since deltas are dynamic and change throughout the trading day.

But knowing how to watch and manage your own portfolio’s delta is a crucial skill to maintaining your portfolio’s “health” and making sure you aren’t taking on more directional risk than you can handle.

Your Only Option,

Mark Sebastian

Big Money’s Milk Money

Hey Trader,

Whole milk, skim milk, 2% milk, goat milk, soy milk, almond milk, rice milk, coconut milk, cashew milk, hemp milk …

Did you know they even have quinoa milk now?!

Is there anything they can’t milk these days?

With the emphasis on “green” alternatives, the milk market has been exploding with new options as people look for more eco- and health-friendly options to add to their cup of morning java, or pair with their favorite cookies …

And it looks like Smart Money is getting in on the milk game …

But what are they adding to their cereal?

Not Crying Over Oat Milk

After IPO’ing at $17 per share on May 20, 2021, the journey hasn’t been smooth for oat milk stock Oatly (Ticker: OTLY).

In fact, the shares have more or less been in a downward spiral after popping briefly above $29, and now sit at just $6.83, in spite of a median analyst price target of $15.

Big Money seems to want a big cup of whatever OTLY is serving up, though …

Last Thursday, this notable Big Money bet crossed in OTLY’s pits, in spite of the shares closing more than 1% lower on the day at just $7.72:

This Big Money trader opened up a 1×2 call ratio spread, buying 10,000 January 2023 7.5-stike calls for $2.80.

While buying the 7.5-strike calls outright would have cost this trader $2,800,000, they instead chose to sell 20,000 contracts of the January 22.5-strike calls for $0.52, which brought in $1,040,000 to help cover the cost of the trade.

Now, this is an interesting play. There is quite a bit of profit potential here, with this trade achieving maximum profits if OTLY sits at $22.50 by the time these expire one year from now. Not taking into account fees and commissions, this trader stands to make $13.24 per contract, which works out to a whopping $13,240,000.

However, should OTLY skyrocket back to its post-IPO highs within the next 12 months, this trader is looking at theoretically unlimited risk, given they’ve sold twice the amount of calls as they purchased.

But I’m not particularly interested in whether this trader will make their maximum profit or not …

Instead, I’m interested in the fact that they laid out a total of $1,760,000 to make a bullish bet on a stock that has more or less been heading straight down for months …

Do they have an inside line on something good to come?

That isn’t the only notable Big Money action in OTLY’s pits over the last week …

On Tuesday, with OTLY closing 5.5% lower on the day at $7.00, another bullish bet crossed the tape – this time, a simple bullish call spread.

Interestingly, this trader also seems to like the 7.5-strike calls … but the timeframe this trade is working with is significantly shorter than the one above, targeting the upcoming March expiration.

This trade involved the purchase of 10,000 March 7.5-strike calls for $1.05 – a purchase worth $1,050,000.

However, they also sold the same number of the March 12.5-strike calls for $0.15, which helped lower the required outlay to “just” $900,000.

This bullish bet gives OTLY just two months to turn its downtrend around, and regain at least some of what it has lost.

It is interesting to note that these four trade legs account for a significant portion of the second (March 7.5-strike calls), third (January 2023 22.5-strike calls), fifth (March 12.5-strike calls), and sixth (January 2023 7.5-strike calls) most populated contracts in OTLY’s pits.

Big Money is definitely watching OTLY closely …

And it will be interesting to see if perhaps they’re onto something with this whole oat milk thing…

Your Only Option,

Mark Sebastian


This Is A “Gift” For Crypto Options Traders

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,

Take a look at one of the hottest trends in crypto options … DOVs, or Defi Option Vaults. A handful of protocols allow crypto holders to perpetually use their capital to sell covered calls on a few select cryptos … and believe me, the crypto pits have been happy to get on board!

Elsewhere in crypto land … Bitcoin (BTC) pits are providing fantastic hedging opportunities …

Which could come in handy if J.P. Morgan Chase & Co.’s prediction of SIX rate hikes comes to fruition!

And you’ll find out why dropping realized vol (RV) is a “gift” to traders …

Check out where the opportunities are, and where Big Money is placing its bets, below.

Originally posted on Genesis Volatility

Receive Genesis Volatility’s insight straight to your inbox twice each week by signing up for their free newsletter right here: https://genesisvolatility.substack.com/

DeFi Options

DOVs

One of the recent themes in the crypto options market is structural short volatility flow via “DOVs” (DeFi Option Vaults).

Protocols such as FriktionAtomic.finance and Thetanuts allow crypto holders to allocate holdings to structured products that perpetually use the capital to sell covered calls and cash secured puts on Solana, Bitcoin and EVM chains respectively.

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Top Trades this week include:

Frik – (135,594 X) SOL $180 1/21 Calls, sold for 1,111 SOL Premium = $20m (Notional)

Frik – (63,977 X) LUNA $94 1/21 Calls, sold for 704 LUNA Premium = $5.4m (Notional)

Frik – (16,839 X) ETH $3.8k 1/21 Calls, sold for 26 ETH Premium = $54m (Notional)

Tnuts – (7,500 X) WETH $3.8k 1/21 Calls = $24m (Notional)

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$43,051

DVOL: Deribit’s volatility index

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(1 month, hourly)

SKEWS

(Jan. 16th, 2022 – Short-term and Medium-term BTC Skews – Deribit)

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This week we saw a continuation of themes seen in our last newsletter.

First, a persistent parallel vol. selling.

Second, an option skew that mimics underlying spot prices.

The modest relief rally seen this week has enabled BTC option skew to rally +6pts for the short-term expirations and a +3pts rally for long-term options.

Without predicting spot activity, this type of skew and IV compression, once again, provides a fantastic opportunity for 2022 Fed rate hike hedging.

J.P. Morgan Chase & Co (Ticker: JPM) predicts +6 hikes in 2022?!?!

If that materializes to be true, risk assets would need to drop.

At the very least, this type of headwind “likely” prevents upside vol. path from exceeding downside vol. path, a layup for collars or delta-neutral skew trades.

(Jan. 16th, 2022 – Long-Dated BTC Skews – Deribit)

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TERM STRUCTURE

(Jan. 16th, 2022 – BTC’s Term Structure – Deribit)

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We’re seeing an absolute decoupling of short-term options versus the rest of the expiration curve.

We’re entering a new world of structural volatility sellers from new DeFi Option Vaults (DOV).

Projects like Friktion and Thetanuts allow regular long crypto holders to become “Volatility sellers” by parking their holdings into Automated Covered Call or Cash Secured Put Selling structured products.

Most of these flows are targeted to the short-end of the expiration curve, causing a steepening in term structure.

ATM/SKEW

(Jan. 16th, 2022 – BTC ATM & Skews for options 10-60 days out – Deribit)

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ATM IV (left) displays a relentless selling of option volatility with little indication of buyers willing to halt the drop.

SKEW (right) is following spot activity very closely and providing great back-&-forth trading opportunities.

Open Interest – @fb_gravitysucks

BTC

After the last spike of contracts, this weekly expiration comes back to the average with around 16k open positions.

Spot prices at delivery were mainly unchanged compared to the opening bell on Monday and outstanding premium has been balanced between calls and puts. Around 85% of options have expired worthless.

(Jan 14th , 2022 – BTC Open interest – Deribit)

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(Jan 14th , 2022 – BTC Dollar premium – Deribit)

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TOP TRADES:

1. Big short term call strips (43-44k-46k-48k) have been bought in advance of Powell’s speech. Buyer(s) dropped their new positions on the 12th after the rally didn’t materialize, being Theta savvy. Well played!

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2. On the 12th, some sophisticated trader went short Feb. strangles to long March wings. Ratio of 1-3.

The main scenario is to try to monetize violent movement (unbiased direction) in the next 2/3 weeks. Interesting Vega/Gamma profile.

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3. Over $8Mil net premium paid for two separate Jun22 long call spreads. The biggest trade of the week!

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

VOLUME

(Jan. 16th, 2022 – BTC Premium Traded – Deribit)

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(Jan. 16th, 2022 – BTC’s Contracts Traded – Deribit)

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Paradigm Block Insights (Jan 10 to Jan 16) – Patrick Chu

With the market continuing to consolidate off of the key 40k support, the term structures of both BTC and ETH were pushed lower & steeper as the relentless selling of vols related to hedging flows from the DOVs and the lackluster realized vols continued to hammer the front end of the curve lower.

We continued to see two-way interest, with some participants taking advantage of the low vols to put on directional topside bets, while others continued to sell vols via strangles.

(Jan 10 to Jan 16 – Volume Profile – Deribit & Paradigm)

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In BTC, we saw aggressive buying of topside in the form of outrights for 28Jan 44k, 46k & 48k calls in three big clips on Jan 11th, as well as steady buying of 24Jun 40k/60k & 50k/70k call spreads.

Elsewhere, we saw strong interest to sell 30k/60k 25Mar strangles, and put calendars in the 25Feb / 25Mar 30k rolls.

(Jan 10 to Jan 16 – 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. 16th, 2022 – BTC’s Volatility Cone)

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Just like IV, RV is seeing a relentless drop lower.

Nearly all measurement windows are hugging annual lows and providing justification for lower IV.

We think using this opportunity to find smart long vol. plays and hedges is a gift.

Rarely do we get to buy cheap vol. in crypto.

REALIZED & IMPLIED

(Jan. 16th, 2022 – BTC’s 10-day Realized-, and Trade-Weighted-, Implied-Vol.-Deribit)

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Notice that IV and RV are finally moving in tandem.

The last six months has been characterized by a persistent IV “anchor” and wandering RV.

Today we see RV “dragging” IV lower and one of the lowest IV pricing profiles in recent history.

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$3,337

DVOL: Deribit’s volatility index

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(1 month, hourly)

SKEWS

(Jan. 16th, 2022 – ETH’s Skews – Deribit)

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Last week we noted that ETH skew seemed a little too negative given the ETH/BTC trend.

This week we’ve seen a massive rise in ETH skew as spot prices found some stability and a relief bounce.

That said, all expirations remain below par for ETH skew.

(Jan. 16th, 2022 – ETH’s Skews – Deribit)

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TERM STRUCTURE

(Jan. 16th, 2022 – ETH’s Term Structure – Deribit)

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The ETH term structure is also quite steep as IV continues to drop lower.

Remember we’ve noted about 25,000 contracts of weekly vol. traded on-chain Friday via DOVs… decent size considering total 1/21 OI is 131K contracts on Deribit.

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We’re seeing short-term options lead implied volatility lower and massive narrowing of BTC IV versus ETH IV gap….

(BTC 30-day IV (vs) ETH 30-day IV)

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(BTC 7-day IV (vs) ETH 7-day IV)

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ATM/SKEW

(Jan. 16th, 2022 – ETH’s ATM & Skews for options 10-60 days out – Deribit)

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ATM IV (left) is showing a fast and relentless drop.

Skew (right) shows a rather large recovery in ETH skew.

Early in the week, ETH calls provided interesting opportunity as vols and skew provided cheap entry. That trade is likely still an interesting structure component for delta neutral skew trades or outright exposure.

Open Interest – @fb_gravitysucks

ETH

Participants have shown a lot of interest for this weekly expiration, with almost 170k contracts going into delivery.

88% of options have expired worthless and premiums have been concentrated on the put side.

(Jan 14th , 2022 – ETH Open interest– Deribit)

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(Jan 14th , 2022 – ETH Dollar premium – Deribit)

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TOP TRADES:

An internal account transfer of big funds alarmed options-flow-readers with bullish delusion. Puts sold not taken in consideration.

The volume has been subdued all week for Ethereum. Continuation of little interest for big speculative trades.

Interesting to mention: check out the copycat of a trade we’ve seen in Bitcoin. This trader opened a short Feb. 3000/4000 strangle with long March wings at 2000/6000. The 1 x 3 ratio was also maintained.

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

VOLUME 

(Jan. 16th, 2022 – ETH’s Premium Traded – Deribit)

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(Jan. 16th, 2022 – ETH’s Contracts Traded – Deribit)

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ETH option volumes are holding relatively steady.

Paradigm Block Insights (Jan 10 to Jan 16) – Patrick Chu

In ETH, we saw strong interest in selling downside protection, in particular on the 25Mar 2000 & 2500 & 3000 strikes.

We also saw good interest on the 25Mar 2000/6000 strangles and an interesting 1/1.5x/1 structure for 25Mar 5000C/30Sep 6000C/30Dec 7000C.

(Jan 10 to Jan 16 – Volume Profile – Deribit & Paradigm)

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(Jan 10 to Jan 16 – 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. 16th, 2022 – ETH’s Volatility Cone)

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ETH RV is low but remains higher on the volatility cone versus BTC.

REALIZED & IMPLIED

(Jan. 16th, 2022 – ETH’s 10-day Realized -, and Trade-Weighted-, ImpliedVol.-Deribit)

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We’re actually seeing RV above IV.

This is an interesting context given that ETH IV is dropping faster than BTC IV (narrowing IV gap) and ETH skew is more bearish than BTC skew.

There’s good vol. plays lining up!


Like what you see? Make sure you sign up to receive the Genesis Volatility newsletter!

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

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

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


Ford Vs. Tesla

Hey Trader,

Move over Ferrari … there’s a new Ford rival in town!

With Ford Motor Co (Ticker: F) making waves in the electric vehicle (EV) realm, the pickup truck maker is now commonly being compared to the original EV bigwig, Tesla (Ticker: TSLA).

But how has F really compared to TSLA over the last year …

And are the pits reacting?

Let’s take a look.

Revving Up

F opened the 2021 trading year at just $8.51. By contrast, it’s closing price on December 31, 2021 was $20.77.

That’s a 144% gain in a single year … or, if you take Tuesday’s closing price instead, F is up 185% since January 1, 2021.

Since its new CEO took the helm in October of 2020, F’s new focus on electric vehicles seems to be paying off in spades …

And it could be coming for Elon Musk’s brainchild TSLA!

Now, TSLA didn’t see the same kinds of triple-digit returns as F during the 2021 trading year …

But given that it’s starting share price was $699.99 on the first trading day of 2021, a 51% increase is certainly nothing to sniff at!

And both companies are set to hit the ground running this year, with TSLA announcing its 2021 vehicle delivery was up 87% year-over-year, and it is anticipating a further 60% year-over-year increase in 2022, with just over 1.5 million vehicles forecasted to be delivered.

Though F’s current market cap of $87 billion is somewhat dwarfed by TSLA’s $1.2 trillion, F certainly wasn’t going to let TSLA hog the early-year EV limelight. 

F announced on Tuesday that it has plans to nearly double its production capacity for the upcoming F-150 Lightning pickup truck. The company hopes to produce 150,000 vehicles per year by mid-2023.

With the two EV companies set to duke it out for market share, how are traders in the pits positioning themselves?

Looking into TSLA’s pits, the scene is perhaps a bit quieter than you might expect …

TSLA’s open interest is actually slightly lower than normal, at just 94% of its usual amounts. Puts in particular are especially low, at only 91% of their normal open interest.

However, puts still outnumber calls 1-to-1.1 … but that could be partially attributed to the fact that the top two open interest contracts are the June 1-strike (yes, 1-strike) puts, with 147,804 contracts open, followed by the January 1-strike put, with 83,526 contracts open. 

It isn’t until we look at TSLA’s fifth most popular contracts that we see anything remotely near-the-money, with the January 1000-strike call currently having 25,940 contracts outstanding, and a few notches down in popularity is the January 1,100-strike call, with 22,998 contracts open.

Meanwhile, F’s pits are actually busier than usual, with 105% of their normal open interest. And unlike TSLA, F puts are trading at a quicker clip than usual, at 108% of their normal open interest amounts.

However, call open interest outpaces puts 1.4-to-1, and the January 20-strike call currently holds the highest open interest, at 185,441 contracts open.

If we dig into the trading day on Tuesday, F’s daily volume was at 478% of its usual amount, with calls being hammered hard, with 3.3 calls traded for each single put. This is slightly more bullish than usual, with F’s typical volume seeing 2.4 calls traded for each put.

TSLA’s pits were also busier than usual, at 110% of their normal daily volume. Calls were popping, at 117% of their typical daily volume, and outnumbering puts 1.4-to-1.

But then again, Tuesday really was F’s moment in the spotlight, and the two EV heavyweights will continue to duke it out on the streets, and on Wall Street, for quite a while to come.