Monday Alpha: #3

The third edition of Monday Alpha by Premia and Marty is already here! All the latest volatility, events and largest trades news explained for you, anon.

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 Has Vol Bottomed? Twitter Thinks so

Between June 3rd and June 5th, the DVOL Implied Volatility Index dipped to a 39Vol handle (currently 44.3), which is notably low for the crypto markets. With the release of CPI and FOMC data last week, traders began to anticipate a price increase with a looming interest rate pause or cut, but this only held true for traditional markets.

Major cryptocurrencies experienced a price drop, and are now trading at similar prices as before the economic data release.

People on Twitter are fast to assume that this is THE volatility bottom. Simply put, it's impossible to time the return of vol.

BTC ATM IV

1W: 39.01%

1M: 40.27%

3M: 42.60%

6M: 45.91%

Index Price: $26,402.74

ETH ATM IV

1W: 37.80%

1M: 40.44%

3M: 43.64%

6M: 46.81%

Index Price: $1725.62

Things To Pay Attention To

Monday, June 19

• US Bank Holiday

Wednesday June 21

• 2:00EST - UK inflation rate YoY Prev: 8.7%, Exp: 8.5%

• 10:00EST - US FED Chair, Powell, Testimony

Thursday June 22

• 7:00EST - UK BoE Interest Rate Decision

• 10:00EST US FED Chair Powell Testimony

June 30

• 08:30 AM: Core PCE MoM

• Quarterly Options Expiry

The charts above show our standard pricing and the correlation among the various assets we watch. At present, there's not much to say other than that stocks have been melting upward, driven largely by the frenzy around AI – the new 'shiny toy'.

This surge in stocks has overshadowed cryptocurrency markets, leaving crypto flat or trending downwards. Crypto majors are trading around the same price as before the economic data last week.

An interesting trend to observe is the increasing correlation between Gold and BTC. This is something to watch if you’re a Gold Bug. However, it's uncertain whether this will significantly influence the Bitcoin narrative or impact current market conditions.

Largest ETH and BTC Trades

Every Monday Alpha we are bringing you the 5 largest trades from the GreeksLive Block Order Marketplace. We are shining a light and giving you insights into some institutional flows. Though they may not always be the best trade, the right trade, or the “golden ticket” to profitability trade it is interesting to review these orders and go over a different strategy that you, the reader, may want to implement in your own trading system.

• To Join Greekslive Block Market Place: t.me/GreeksLiveBlock 

• Find Greekslive On Twitter: https://twitter.com/GreeksLive

I want to cover the first trade which is called A Put Debit Spread or A Bear Put Spread.

Explanation

A bear put spread is an options trading strategy that involves buying a put option with a certain strike price and selling another put option with a lower strike price.

Both options have the same expiration date. This strategy is used when the trader expects a moderate drop in an asset's price. It reduces the overall cost and time decay (Theta) compared to buying a put outright. The sold put offsets some cost and time decay of the bought put. While it caps your profit, it's a more cost-effective way to bet on a price drop.

How Does it Work?

When you initiate a bear put spread, you are buying a put option with a higher strike price ($1800) and selling a put option with a lower strike price ($1700).

The premium the trader pays for the long put is reduced by the premium they receive from the short put. This reduces the initial investment compared to buying a single put outright.

The maximum profit is realized if the stock price is at or below the short put's strike price (lower strike) at expiration.

If the price of the underlying asset is between the two strike prices at expiration, you can still profit, but the profit will be less than the maximum potential profit.

If the price of the underlying asset is above the higher strike price at expiration, the trader loses the initial investment (the net premium paid).

Max Profit and Loss

The maximum profit from a bear put spread is the difference between the two strike prices minus the net premium paid for the spread. In this case, the maximum profit is ($1800 - $1700 - net premium paid).

The maximum loss from a put debit spread is limited to the net premium paid for the spread. This loss occurs if the price of the underlying asset is above the higher strike price at expiration.

Volatility and Historical Volatility

Has vol bottomed? People on Twitter are fast to assume so…

For now, it looks like a local bottom for vol in the 39Vol handle was around June 4th - June 5th. I’m hesitant to say that this is THE bottom as it is impossible to time when exactly the volatility comes back.

It does seems that we will stay in this low vol regime for a while as we await a catalyst. Without catalyst in the foreseeable future, only time or a black swan will bring vol back.

Let's break down the charts above.

Historical volatility (HV) and implied volatility (IV) are two different ways to measure the uncertainty or risk expected in the price changes of a security.

Historical volatility is a measure of the price changes of an asset in the past. It is typically calculated as the annualized standard deviation of returns and is backwards-looking.

Implied volatility, on the other hand, is derived from an option's price and shows what the market expects future volatility to be. It is forward-looking and reflects market participants' expectations of future price swings in the underlying asset.

When Historical Volatility is Below Implied Volatility

When HV is below IV, it suggests that the market expects future volatility to be higher than what has been observed in the past. This could be due to upcoming events that are expected to cause larger price movements, such as earnings announcements, economic data releases, or significant news events.

From a trading perspective, options prices might be considered expensive in this scenario because options pricing models, like the Black-Scholes model, use volatility as a key input. A higher IV will lead to higher option premiums. Therefore, options sellers might see this as a beneficial situation since they would receive a larger premium for selling the option.

When Historical Volatility Climbs Above Implied Volatility

When HV rises above IV, it suggests that recent price movements in the underlying asset have been larger than what the market had expected. This could be due to unexpected news or events causing the price of the underlying asset to fluctuate more than expected.

In this situation, options could be considered "cheap" since the option's price may not fully reflect the increased volatility of the underlying asset. Options buyers might see this as a beneficial situation since they would pay a lower premium for buying the option.

Keeping an eye on these charts will be essential in the next weeks and months, and we will certainly keep bringing regular updates.

Currently, ETH's Historical Volatility has barely exceeded its Implied Volatility, while BTC’s HV remains under its IV. The insights from these charts will play a significant role in the future, from shaping investment strategies to understanding new market trends.

Personal Notes from Marty

We are personally still selling short-term garbage to fund our longer-term Vega trade. Daily and Weeklies have been our favourite sells. Since we cannot perfectly time the return of volatility…

Essentially the play is a longer-term bet that volatility will rise in the future. This is just an insight into what we are looking at/trading currently, of course, you’re not seeing the whole portfolio or hedges.

Just because an option is "cheap" doesn't necessarily make it an absolute buy.

Volatility can always decrease further. As discussed in previous newsletters, what's the catalyst to spark a return of volatility? It seems like volatility will continue to fluctuate for the foreseeable future, with only time, or a black swan to dig us out of the “vol hole”.

That wraps it up for Monday Alpha #3!

Let’s recap:

• Still no catalyst for volatility, especially since the release of FOMC and CPI data

• For ETH, HV has crossed above IV

• Stocks Leaving Crypto in the dust, while markets playing with the shiny new toy, AI

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