Option Pit Crypto - June 13th, 2024

Option Pit Crypto – June 13th, 2024

Greg Magadini

BY GREG MAGADINI

June 6, 2024

Hey Crypto Traders!

Here is the latest Crypto update

USA Week Ahead:

Wednesday 8:30am: CPI
Wednesday 2:00pm: FOMC Rate Decision and Press Conference
Thursday 8:30am: PPI

Macro

Last week we saw the employment report beat upside estimates by a large margin. The strength in the jobs market sent bonds crashing lower along with precious metals, as the market prices in the Fed keeping rates “higher for longer”.

Although the US unemployment rate moved higher from 3.9% → 4.0%, the current rate of 4% is historically extremely low.

Payroll numbers came in at +272k (vs +190k expected and +165k previous).

Lastly, hourly wages came in at +4.1% y/y, which is most definitely above a 2% overall inflation target. Wage trends are a historically “sticky” component of inflation.

wsj.com

In response to the strong US employment numbers the market is now convinced this week’s FOMC rate decision will keep rates unchanged.

CME “FedWatch” Tool

Many in the market are now questioning if any rate cut will occur in 2024. This has helped send hard-assets lower in response, a potential macro drag on crypto as well.

Finviz.com

BTC: $69,688 (+2.9% / 7-day)

ETH :$3,700 (-2.1% / 7-day)

SOL :$161.28 (-0.7% / 7-day)

The relative ETH vol “fade trade” (short ETH vol) remains the theme this week. I find this bias by first analyzing the BTC leg of the relative vol play, described below.

Looking at BTC for the overall direction of the market and the associated option pricing, is a logical benchmark that should reflect all market fundaments: macro, regulatory and industry specific.

Technically speaking, BTC is looking to test the upper bound of the recent 60k-70k range and potentially make new all-time-highs. Everyone is looking at $100k BTC as the next big target price.

Current realized volatility is being measured around 45%, if we look at the probability cone (below) we see that 45% RV would put BTC at +1 standard deviations for $100k BTC by EOY.

Subjectively, this seems “very fair” to me. If options were pricing +3-standard Deviations to get to $100k by EOY, I would say options were cheap and underpricing the probability of getting to $100k.

1-standard deviation however, seems like “fair pricing” at BEST. Even, potentially expensive for option pricing, as I expect a relatively controlled “grind” higher for BTC spot.

ETH Dvol (divided by) BTC Dvol

Therefor if BTC is currently pricing fair/expensive option pricing, looking at the ETH/BTC DVOL ratio highlights that ETH vol is currently at 12-month highs versus BTC.

ETH ∆25/ATM Wing Ratio

Next, if we look at the ∆25 call wing for ETH (as an ATM IV ratio), we can see the ∆25 call wing is at the upper range of the 12-month relationship… meaning the ∆25 call wing is an expensive part of the expensive ETH vol.

The VRP is high on ETH, so we can’t argue that RV is justifying the ETH vol premium.

Finally, the ETH Call overwriting flows continue. We can see large selling volume over the weekend for the $3850-Calls, this flow is knocking down the current ETH vol bid.

These overwriting flows previously saddled dealers with positive gamma inventory in ETH. I expect a similar profile return.

Conclusion:

In the longterm I actually like the ETH relative vol purchase argument… but in the short-term, ETH IV reacted too quickly to the positive ETF approval.

Since the ETF approval, spot prices have FAILED to follow higher. Realized volatility was confined to one day.

ETH RV is now dismal. Therefore I continue to think ETH relative vol is expensive in the short/medium terms.

Paradigm’s Week In Review

BTC +2.50% / ETH -2.27% / NDX +1.78%