Monday Alpha: #4

Welcome to the fourth edition of Monday Alpha by Premia x Marty!

We also want to remind you about Premia Academy designed to offer an engaging and interactive learning experience, allowing both novice and seasoned traders to deepen their understanding of DeFi options trading.

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TLDR: Muted volatility

The current market conditions continue to be characterized by a prolonged period of muted volatility, with slight fluctuations in price movements. This low volatility regime has persisted, offering both challenges and opportunities for market participants. Recently, some institutional players have adapted their strategies to favour long call spreads. Using long call spreads, these players aim to capture potential upside movements while limiting their downside risk. This strategy allows them to participate in the market while maintaining a cautious stance, navigating the uncertainty of the current low volatility environment.

BTC ATM IV

1W: 38.87%

1M: 39.21%

3M: 44.48%

6M: 49.51%

Index Price: $30,251.31

ETH ATM IV

1W: 40.22%

1M: 41.58%

3M: 43.73%

6M: 48.86%

Index Price: $1922.10

Things To Pay Attention To

Tuesday, July 18

• 8:30 AM EST - USA Retail Sales Exp: 0.5%

Wednesday, July 19

• 2:00 AM EST - UK CPI YoY Prev: 8.7%, Exp: 8.2%

Wednesday, July 26

• 2:00 PM EST - USA FOMC

Friday, July 28

• 8:30 AM: USA Core PCE MoM

Above is our price comparison chart across various assets. Current crypto prices are stalling at around $30,000 per BTC, and $2,000 per ETH.

Recently, BTC and ETH have shown an increasing correlation with stocks, indicating a trend towards the traditional financial markets' movement patterns. In contrast, gold continues to exhibit a negative correlation, which maybe is reinforcing its status as a hedge against market volatility and economic uncertainty.

Largest ETH and BTC Trades

In our previous biweekly editions of Marty Monday Alpha, we've brought to light Greeks Live Blocktrade data and discussed various options strategies such as Short Calendar Spreads, Short Strangles, and Bear Put Spreads. Today, we're shifting our attention to a sizable bull call spread trade involving Ethereum options.

Let's dive into it!

The trader implemented a bull call spread strategy with Ethereum that expires on March 29, 2024. This strategic move involves two option contracts. First, they purchased a call option with a strike price of $2,000, giving them the right (but not the obligation) to buy Ethereum at $2,000 on or before the expiration date. Simultaneously, they sold a call option with a strike price of $3,000, potentially obliging them to sell Ethereum at $3000 on or before the expiration date if the buyer decides to exercise the option. The total notional value of this trade was $29,882,600 with a total of 16,000 contracts.

In this particular trade, both the maximum potential profit and loss are clearly defined by the strike prices and the net premium paid or received. The maximum profit is realized if Ethereum's price at expiry is at or above $3000 and equals the difference between the strike prices, minus the net premium paid. On the other hand, the maximum potential loss, which occurs if Ethereum's price at expiry is at or below $2,000, is equivalent to the net premium paid to establish the spread.

A bull call spread strategy like this can offer several benefits over simply purchasing a single call option. For instance, the cost of buying a call option, especially for volatile assets like Ethereum, can be offset by creating the spread by selling a call at a higher strike price. This effectively lowers the overall cost of the strategy, while still putting on a directional bet. Additionally, the maximum loss a trader can incur when setting up a bull call spread is limited to the net premium paid, as opposed to an outright call where the entire premium is at risk. Bull call spreads can also generate profits in less volatile markets, where the price of Ethereum rises moderately. This contrasts with outright call options, which require a substantial price increase to offset the premium paid. A bull call spread provides defined profit and loss levels, which can simplify risk management and trading plans. Lastly, a bull call spread minimises the effect of time decay (Theta), since the time decay on the sold call option can offset that on the purchased call, particularly as the contracts near their expiration date. This makes the bull call spread a more theta-efficient strategy than a simple call option, while still making a directional bet.

It is worth mentioning that trades number 1, 2, and 5 are all bull Call Spreads with various assets, strikes, and expiries. It will be on our radar to see if any more of these larger directional bets come through the tape.

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Volatility and Historical Volatility

Over the past six months, the 'At the Money' IV chart reveals a distinct downtrend, with implied volatility dropping from the mid-70s to the low-40s. This significant decrease in IV suggests that market participants are anticipating fewer price fluctuations, particularly with BTC stuck around the $30,000 level and ETH hovering around the $1,900 mark. Since the FTX crash last November, IV has been down and to the right, reflecting a lack of foreseeable catalysts that could trigger substantial price movement in the crypto market. In previous write-ups, we have talked about potential catalysts including the BTC halving, and the 2024 USA Presidential elections.

In the aftermath of the recent CPI print, we saw a notable pop in IV. Particularly, the front end experienced a sharp rise, acting as an immediate reaction to the CPI data. However, the impact on long-dated expiries was notably more subdued, indicating a limited influence on long-term volatility expectations. Despite the brief spike post-CPI, the IV has since fallen, and current levels are now below those seen during the peak following last week's CPI announcement. Simply put, this suggests that the heightened near-term uncertainty captured by the front-end volatility did not translate into increased volatility expectations in the longer term. In the current low IV environment, it's more crucial than ever for traders to adapt and strategize effectively. While lower IV signals decreased perceived risk and lowers the cost of buying options, it also means reduced income for option sellers. It's worth mentioning that it is almost impossible to time a rise in IV precisely. As mentioned in previous newsletters, we've tailored our approach to sell short-dated options, using the proceeds to finance long-term Vega plays. This essentially involves leveraging the income from writing short-term options to finance the purchase of longer-term options, betting on a future increase in volatility.

Some new charts added to the Newsletter are provided by Velo Data. Make sure to join their waitlist, too.

Gamma exposure by strike

Areas Of Interest

Gamma Exposure by Strike is an essential tool in options trading and an interesting visual chart to gauge market activity, offering insights into hotspots of activity as it relates to existing options positions. The strike prices currently drawing interest are:

• BTC: $30K, $31K, $32K

• ETH: $1,800, $1,900, $2,000

These values represent areas where substantial options trading has taken place, indicating possible pivot points for escalated buying or selling pressure. As the price of the underlying asset nears these specific strike points, we may see increased trading activity as market participants manage and hedge their positions. It's essential to keep an eye on these key strike prices as they may catalyze notable price movements in both the options and the underlying assets.

That wraps up our Marty X Premia Monday Alpha #4. Let’s recap:

• Volatility has stayed muted longer than most participants have expected

• Prices have stalled around $30,000 BTC and $2,000 ETH

• Areas of interest $30-32K for BTC, $1,800-2,000 for ETH

• Institutional Players are favoring Long Dated Call Spreads

• Premia Blue Academy has been released

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