Market Data by Premia x Marty: #5

Greetings, Premians!

Welcome to the fifth instalment of the Premia x Marty monthly Market Data newsletter. As always, we appreciate your readership and welcome any feedback to enhance future editions. Feel free to reach out to us via the Premia Discord or Twitter!

In this newsletter, we will dive into:

• June expiry

• Market volatility

• Current market stance

• Future events of interest

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: Tradfi is coming to play in the crypto sandbox

• BTC $30434.21 (84.08% YTD)

• ETH $1915.11 (60.22% YTD)

• NDX $15179.21 (37.51% YTD)

• SPX $4450.37 (15.50% YTD)

• XAU $1919.38 (5.26% YTD)

Premia All-time volume: $349.60m

BTC ATM IV

Index Price: $30434.21

• 1W: 42.20%

• 1M: 44.02%

• 3M: 45.79%

• 6M: 48.90%

ETH ATM IV

Index Price: $1915.11

• 1W: 44.02%

• 1M: 42.83%

• 3M: 44.63%

• 6M: 46.64%

The recent announcement of BlackRock, along with other key financial entities, filing for spot ETFs, has injected a significant boost into activity in the crypto space. It has also revived the previously stagnant options activity, which had a largely boring period for over two months. We were trading 30vol handles, now we are in the 40-50 handle range.

Interestingly, traditional finance players are also exploring other investment avenues in the crypto space again. The main example of the past week is the Chicago Mercantile Exchange (CME) announcement of BTC/ETH ratio futures. This financial instrument will allow traders to speculate or hedge on the price ratio between Bitcoin and Ethereum, providing another way to express market views and manage risk based on the relative performance.

These initiatives by TradFi entities mark a significant advancement in the acceptance and integration of cryptocurrencies into established investment vehicles. The new futures contracts and the proposed ETFs represent opportunities for enhanced liquidity in the cryptocurrency market and provide a broader array of investment options for both institutional and retail investors, specifically in the US, where crypto regulations are harsh.

It's worth noting that the Securities and Exchange Commission (SEC) is actively engaging in dialogue with these entities to iron out the legalities surrounding their offerings. Despite the regulatory complexities, the overall outlook remains positive, with high expectations that at least one of these ETFs will secure approval.

We are expecting a higher probability of Futures ETFs being approved over Spot ETFs, primarily due to potential market manipulation concerns associated with the latter. Futures ETFs, operating based on predetermined contract specifications, offer a certain degree of protection against market manipulation. Futures-based ETFs are perceived more positively among regulators.

Rolling Correlation

The 30-day Rolling correlation chart is not the main chart we look at to develop strategies, but it is a fun chart to view and gain some insights. Regrettably for gold bugs, the correlation between Bitcoin and gold itself is diminishing rapidly. In contrast, cryptocurrencies, particularly BTC and ETH, are SLOWLY beginning to exhibit a growing correlation with the stock market. However, while equities maintain an upward trajectory, crypto markets have shown a trend of slower growth.

Gamma

Our readers might recognize the Gamma Exposure by Strike chart from previous newsletters. For first-time readers, I encourage a review of our past issues for a detailed understanding of this chart's workings and interpretation. The charts above show the state of Gamma Exposure by Strike as of July 3rd morning, following the recent June Expiry this past Friday.

There has been a minimal shift in Gamma Exposure following the June expiry which reveals traders largely maintained or rolled over their positions, resulting in persistent gamma concentrations at the $30K and $1900 levels for BTC and ETH, respectively.

This continuity could indicate market stability, reflecting confidence in the confidence of these levels. Alternatively, it could signal a range-bound market in need of a significant catalyst to disrupt these positions. Personally, I thought we were down only vol, and flat prices for longer, yet we got this TradFi news sparking some new interest in our coins instead of all of the AI stocks.

Areas of interest:

• BTC: $30K, $31K

• ETH: $1900, $2000

Volatility

Following the June expiry in the options market, typically, contracts that were in the money are exercised, resulting in the exchange of the underlying asset. In contrast, at-the-money or out-of-the-money options often expire worthless. Although there tends to be substantial chatter or speculation leading up to these expiries, the events themselves are often quite uneventful.

Theoretically, large Open Interest in these expiring positions can lead to heightened volatility in the underlying asset due to shifts in open interest and trading strategies. However, this was not the case this time around. Instead, traders anticipated this event on the preceding Thursday, with vol dropping from 48 to 42, only to rebound to a 46 handle following the expiry.

Despite the entrance of major traditional finance players into the crypto sandbox, we remain within a subdued volatility regime. Even with these significant developments, market volatility has remained relatively muted or trending downwards.

Before we wrap up, Marty had a special request to clear something up for a reader. An avid reader of the newsletter came across the following quote in a different newsletter and reached out to Marty for clarification. Typing on Twitter DM’s can only help so much so Marty told him we would put it in the next Newsletter. OK, the following quote is not from Marty, but from a different newsletter. We will be breaking it down, what it means, and how/why it's wrong. Again, this is not from Marty:

”If you haven't already, now would be a good time to solidify in your brain that implied volatility is a measurement of market liquidity. IVs rise when liquidity is inadequate and fall when liquidity is abundant. In the context of gamma exposure, this is interesting, because when an option is sold, it increases GEX and lowers IV (IVs go down when people sell options), and when IVs go down, GEX goes up even more! So the process of selling an option features a two-pronged effect to increase GEX (add liquidity). You'd expect the effect of buying an option to be the exact opposite, but it's not: Though buying an option does, per se, decrease GEX, it also raises IV (IVs go up when people buy options), and a higher IV reduces the negative GEX effect of buying options.”

This is wrong. But why Marty?

The statement that implied volatility (IV) serves as a measure of market liquidity is inaccurate. IV is fundamentally an estimation of the expected volatility of an asset over a specific period, derived from the price of options. Although changes in market liquidity can impact IV, they aren't the same.

The statement "IVs rise when liquidity is inadequate and fall when liquidity is abundant" isn't accurate either. IVs fluctuate based on the market's anticipation of future volatility, which can be influenced by a variety of factors beyond liquidity.

The complex relationship between Gamma Exposure (GEX) and IV, as well as the effects of buying and selling options, can't be oversimplified. While it's true that under certain conditions selling an option can increase GEX and decrease IV, it doesn't automatically lead to a reciprocal increase in GEX when IVs decline. The impacts on GEX and IV from trading options are influenced by several elements such as strike price, underlying price, time until expiry, and market conditions.

Finally, the claim that gamma generally provides market liquidity, acting as a stabilizing force, is somewhat misleading. Although gamma can trigger increased trading activity (thus increasing liquidity in one sense), it can simultaneously contribute to greater price volatility, which isn't necessarily stabilizing. It's crucial to recognize that the effects of gamma on market dynamics are multifaceted and largely dependent on the specific market conditions at play.

That concludes our fifth newsletter. If you have any further questions or comments, please don't hesitate to reach out to us on Twitter or Discord. We understand that the final segment might have been challenging to follow, but it was crucial to address. We value your feedback and are open to suggestions for future newsletter topics or content. Thank you for your continued support, and we look forward to bringing you more valuable insights in the next edition.

Events to watch

As we look into the month of July, some events stand out that may bring some life to the crypto markets:

• 05 July - FOMC Minutes 2 pm EST

• 07 July - Non Farm Payroll / Unemployment 8:30 am EST

• 12 July - CPI 8:30 am EST

• 13 July - PPI 8:30 am EST

• 26 July - FOMC 2 pm EST

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

Let’s Recap:

• Vol is still muted even post-June Expiry

• TradFi is coming to the crypto sandbox

• The claim that implied volatility (IV) is a measure of market liquidity is incorrect.

Areas of Interest:

• BTC $30K, $31K

• ETH $1900, $2000

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