Monday Alpha #24

TL;DR: Oops I Did It Again

Author

Marty
August 12, 2024

Monday Alpha

Please note that Premia does not provide 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.

Note: ARB STIP BRIDGE incentives are live on Premia. Feel free to come check out the platform, deposit in vaults, trade some options, and get some extra ARB juice. Info on Maker/Taker rewards here.

TL;DR: Oops I Did It Again 

BTC ATM IV

  • 1W: 61.37%

  • 1M: 56.29%

  • 3M: 59.36%

  • 6M: 62.88%

  • Index Price: $58,576

  • DVOL: 57.94

ETH ATM IV

  • 1W: 78.67%

  • 1M:72.15%

  • 3M: 72.78%

  • 6M: 74.88%

  • Index Price: $2,636

  • DVOL: 74.83

Weekly Insights from GreeksLive

It was a wild week in the markets. This week's topics are the Japanese yen carry trade unwind, the largest trades, mass liquidations, and Marty's thoughts. Let's start with the largest trades on the Greeks Live Block Trade Marketplace. There was a lot of variety, with no clear picture from the smart money. Some trades involved hopium plays, while others involved short call spreads and long call spreads, utilizing various strikes and strategies. Last week left many people confused, as most were likely trying to cover or protect their positions.

BTC & ETH Implied Volatility Term Structure

Marty’s Thoughts

The front end is insanely high here, with no news besides Trump going on a Spaces with Elon... There is some U.S. data coming in mid to late week, but it’s tomorrow’s expiry that is lifted. If this were related to U.S. data, then the expiry would have to cover the data release date. Let's not do this again, folks—let's not speculate on whether Trump says anything good or bad. He just did the BTC conference, and we got smoked. I wrote in the last newsletter that I was not 100% convinced by Trump's speech, and it turns out I was correct. I don't think this podcast is meaningful. That being said, there is a trade here.

November 8th looks "cheap" relative to what we are expecting with election hype. We are targeting this expiry to accumulate a position. What do I mean by "cheap"? Volatility looks cheap relative to what the market is expecting. Risk assets will start getting more volatile leading into an election.

We saw mass liquidations last week as the Japanese yen carry trade unwound Monday morning. JPM says 75% of the trade was unwound. I haven't dug too deep into the numbers, but I know that the BOJ caved, and as a trader, if I knew that the Bank caved, I would just stack up on the trade again. Hedge funds are not as regulated as banks, and they are able to highly leverage these trades. I would not be surprised if the trade was just stacked up again. If you are unaware of what I'm talking about, let's go over it.

A trader borrows JPY at zero to low interest rates and puts it in another currency with a yield higher than the borrow rate, collecting the difference after paying off the loan in JPY. The trade is "free money." Well, in trading, there is no free lunch, and the BOJ raised rates, causing the borrow rate to increase, and in the end, forced traders to unwind the trade. This seems contained, and the market handled it pretty well as unwinds were fast. Though JPM says 75% unwound Monday and Tuesday last week, I would assume the trade is back on as the BOJ showed their hand. This is something worth watching as time goes on. There is a good book about carry trades if you are interested in learning more. The book is called The Rise of Carry. It was funny to see everyone panic and call for emergency rate hikes over a little 5% down day, lol.

Something else worth paying attention to is U.S. data. Crypto is just a follower of macro now; we are not uncorrelated, and institutions are here. Crypto is the last free market as it trades 24/7, so we are still the first movers. The data from the U.S. seems to be getting worse and worse, and everyone is expecting cuts at the next FOMC. I would just be wary for the next little bit of time as it seems the Fed is behind (shocking). I am not saying we won't get a cut, it just seems the U.S. is really struggling and a few market sectors are keeping it afloat. I’m more thinking through Q4 or Q1 here as things start to come to light post-election. I don't expect them to crash markets into an election.

Wrap-Up

Recap:

Trade on Premia: https://app.premia.blue/
Marty Community Telegram: https://t.me/optionswithmarty

DeFi Options Premia

Join the next generation of Decentralized Finance with Premia and Archetype

Premia Blue is the first non-custodial options exchange with fully customizable options parameters and risk exposure.

Maximize capital efficiency, define your own risk, and optimize fees earned with Premia Blue on Arbitrum!

Reply

or to participate.