Market Data by Premia x Marty: #4

Hello Premians!

This is the fourth edition of the monthly Market Data newsletter by Marty. We appreciate all readers and welcome all feedback for future write-ups! You can contact us in the Premia Discord, or on Twitter!

Please note, Premia does not provide any investment advice and nothing herein should be construed as such. Anyone considering trading or holding derivatives or crypto assets should be aware that the risk of loss can be very high, and it is upon each individual to seek advice from an appropriate professional advisor.

TLDR: Vol can always go lower

• BTC $27067 (63.58% YTD)

• ETH $1866 (56.08% YTD)

• NDX $14292 (29.62% YTD)

• SPX $4181 (8.49% YTD)

Premia All-time volume: $333.10m

Index Price: $27067

1W: 41.0%

1M: 39.3%

3M: 41.4%

6M: 44.3%

Index Price: $1866

1W: 38.9%

1M: 38.6%

3M: 41.5%

6M: 45.4%

Rolling correlation

NQ flying compared to crypto!

The relationship between TradFi and cryptocurrencies has taken a distinct shift recently. Nasdaq (NQ), a tech-heavy index, has been soaring to near all-time highs, leaving cryptocurrencies lagging behind. It appears that the financial world has discovered the new shiny toy… AI.

AI is currently the focal point in the world of traditional finance, with just this week NVDA hitting a 1T market cap. It’s strange to see companies, regardless of size, hustling to align with this growing AI trend. Some are even going to the extent of integrating ‘AI’ into their name, whether to secure funding or to just keep pace with the changing landscape.

We believe this inverse correlation between TradFi and cryptocurrencies is expected to persist until a new volatility cycle emerges in the crypto sector, which, as it stands, seems to be a distant possibility. We’ll dive deeper into volatility regimes later in this newsletter.

Gamma by Strike

Looking back on our last month's newsletter and referring back to the specific gamma chart, one major shift stands out — the changes surrounding the $30K BTC strike. Last month, the market mood was more optimistically bullish, with a strong gamma concentration at $30K BTC and between $1900/$2000 ETH.

However, the landscape has significantly altered since then. With volatility plummeting and market participants pivoting their strategies to shield against potential downsides, this bullish sentiment has noticeably cooled off. This shift is particularly evident in the run-up to last night’s Debt Ceiling vote in the US House of Representatives, where the discussions have brought uncertainty to the market. The bill has passed the House, and now it moves to the Senate and finally to the President of the United States. All in all, it seems like this bill will pass smoothly in time for the deadline, pushing the debt ceiling out through the US 2024 Presidential Election. We are expecting markets to be cautious and risk-off through the Debt Ceiling talks, all the way through CPI/FOMC the week of June 12th.

These gamma charts for both Bitcoin and Ethereum reveal these changes in market sentiment and positioning. What was previously a market bullish on upside potential has turned cautious, as evidenced by the increased protective measures being taken.

The market seems to be playing a wait-and-see game in the face of these political developments, with traders looking to protect their investments and brace for any potential impacts. Although positions can shift rapidly leading to possible price upticks based on new developments, the currently muted volatility makes these outcomes less predictable.

Areas of Interest:

• BTC - $27K, $28K, $30K

• ETH - $1800, $2000

Vol in the gutter

Currently, the Implied Volatility (IV) stands in the mid-40s, while the Historical (HV), has dropped below 30.

As volatility plummets, a common trend among major players in the vol space highlighted in our previous discussions, is to sell short-term garbage and purchase long-dated Vega, which is a measure of an option’s sensitivity to changes in the volatility of the underlying asset. Some are even calling this a “Crowded Trade”.

What does this mean, Marty?

The strategy of selling front-end options and buying long-dated Vega suggests that traders are betting on uncertainty extending into the future. In simpler terms, they’re selling options that are expected to expire soon (which have low IV due to the shorter timeframe) and buying options that expire further in the future (with higher IV due to the longer timeframe and greater uncertainty).

It’s interesting to point out one trader whose strategy diverges from the norm. Last time, we broke down a Calendar trade where this individual bought the June contract and sold the September contract, both for the ETH 2200 strike. This move goes against the current trend, which makes it all the more noteworthy. We’ll be keeping a close watch on this trade to see if the trader decides to close it out or to roll it over to a future date. It should be noted that we don’t have full insight on who this trader is, and what their whole book looks likes.

Low volatility, particularly in the crypto market, can be disconcerting for some traders. Continuously selling volatility in such conditions can be risky, as any substantial spike in Implied Volatility (IV) could potentially destabilize one’s portfolio if not managed properly. For the time being, it appears that the larger players are still comfortable in this low-volatility environment, and it will take time or a black swan to disrupt this low-volatility trend. Vol can stay low or muted for a long time, just because it’s “cheap” doesn’t make it the right time to buy.

It is essential to note that a mass alignment of major players, or ‘the herd’, being short on volatility could lead to dramatic repercussions in the event of a significant volatility spike. This situation would force many to exit their short positions quickly as the market moves against them. In the cryptocurrency market, known for high volatility and lower liquidity, the effect of such a squeeze can be large. As this is unlikely, though it’s not to say it can’t happen.

Future Organic Vol Events:

• HKG allowing retail to trade crypto can increase flows

• Bitcoin Halving

• US 2024 Presidential Election

IV vs HV for BTC and ETH

To wrap it up, it is important to look at various aspects of the vol space to come to a conclusion about where vol is going.

Crypto vol is still young, but it has some of the smartest and most talented people in the space. The herd or smart money is favouring selling short-dated options and buying longer-dated options. This strategy is indicative of the current major downtrend in volatility.

However, it’s essential to remember the space we are in and that volatility tends to revert to the mean over time. This current approach has seemingly put many market participants on ‘autopilot,’ converging towards a similar trade setup. Yet, they may be right, as we look into the future, a clear catalyst to spark a resurgence in crypto volatility seems absent, barring the organic volatility triggers anticipated in 2024.

• 02 June — Unemployment rate and Non Farm Payrolls 8.30am EST

• 13 June — CPI 8.30am EST

• 14 June — FOMC 2pm EST

That finishes up our fourth newsletter, thank you for reading and let us know if you would like to see something new next time!

Let’s recap:

• Vol has fallen off a cliff

• Nasdaq has outperformed crypto in the month of May, but Crypto is still up more YTD

• Areas of Interest BTC $27K, $28K, $30K and ETH $1800, $2000

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