Monday Alpha: #5

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

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.

TLDR: Vol all-time lows, low/muted vol regime remains

Deribit's ETH DVOL hit a low of 30.13, and BTC DVOL hit 31.41.

In June, we highlighted the possibility that we might be witnessing a local bottom in volatility. This means that while it was the lowest point at that time, it might not necessarily be the absolute lowest point we would see. On June 5th, 2023 both BTC and ETH DVOL were hovering around 39. Our prediction held true. Since then, volatility has continued its downward spiral into the low 30 handles.

BTC ATM IV

1W: 25.92%

1M: 29.84%

3M: 35.45%

6M: 40.48%

Index Price: $29426.5

ETH ATM IV

1W: 26.17%

1M: 27.71%

3M: 29.61%

6M: 35.29

Index Price: $1848.99

Things To Pay Attention To

Wednesday, August 16

• 2:00 PM EST - FOMC Meeting Minutes

Thursday, August 17

• 8:30 AM EST - USA Unemployment Claims - Exp: 240K, Prev: 248K

August 24-26

• Jackson Hole Symposium

Largest ETH and BTC Trades

Institutional players are favoring longer-dated bull call spreads again, showing their long-term hope in the rise of prices. Yet, they're also buying shorter-dated puts as protection against unexpected short-term dips.

Despite today's low volatility, there's a clear interest towards these long call spreads. This move seems to anticipate shifts influenced by potential Futures/Spot ETF approvals, the front-running of the BTC halving, and potential changes in US interest rates.

On the upside, hopes are pinned on ETF green lights, front-running ahead of the BTC halving, and US rate cuts. On the other side, the bearish concerns circle around potential ETF delays and US rate hikes.

Why long call spreads? They provide a more affordable trade to put on to benefit from potential price rises compared to outright calls, without paying as much Theta.

As for the shorter-dated puts, they're a hedge against sudden market shocks. Even with a bullish long-term view, there's recognition of potential bumps along the way, be it an ETF delay or a black swan event.

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BTC and ETH prices

Both assets are rangebound, volatility is spiraling down. Volatility sellers have crowded into the short-vol trade.

We have been the most vocal about the low volatility regime and how it could last longer than most people expected. We are currently at a pivot point we feel that vol can raise significantly at any point and that the risk-reward of being 100% committed to short vol is not worth it. We have pivoted our strategy to nibble more and more longer-dated Vega than before.

BTC and ETH Gamma Exposure by Strike

Areas of Interest

BTC: $29K, $30K, $32K

ETH: $1800, $1900, $2000

What stands out in the ETH chart is the distinct exposure to the upside compared to the downside. This trend aligns with our observations of larger players favoring the long call spreads we discussed earlier. In such a rangebound market, it's essential to monitor the strikes closely, especially as prices approach these areas of interest.

As price approaches these levels, there's a shift in flows across options, perps, and spot markets, with many adjusting their portfolios and hedges in response. While we don't personally implement a trading strategy based on these observations, it's intriguing to track the price movements as they approach these specific levels.

Volatility

The last time we presented the ATM IV, we highlighted a 6-month downward trajectory of IV. Now, taking a closer look at just a one-week window, there's a clear indication of Vol hitting a local bottom around August 12/13. The crypto landscape has been anything but dull. From the "Curve Wars" to allegations surrounding Binance, and the approval of the 2x Futures ETF, the events have been relentless. We've witnessed almost every conceivable catalyst (don’t jinx it Marty) that could reignite volatility. Yet, time and again, volatility has been suppressed, from the front end of the curve right through to the back end.

Adding to this, it's worth noting that such consistent suppression of volatility, especially in the face of significant news and events, suggests a strong underlying market sentiment. No one wants to come to play in the crypto sandbox right now when they can go play with the shiny new toy, AI and tech stocks. With more and more people selling vol, and now everyone become an expert” voltard on Crypto Twitter (Crypto X? what are we calling this thing now) it seems it’s just a matter of time before the balloon pops. We are favoring long-dated Vega over keeping the majority of the portfolio short vol.

Before we wrap up, it's time for…

Thoughts with Marty

A thought for you to personally consider is the alternative avenues for gaining exposure to the crypto upside. If one's goal is outright exposure to the space, why not turn to stocks like $RIOT or $MSTR? Why or why not? Since the start of the year, RIOT has surged by over 330%, and MSTR has seen an impressive rise of nearly 200%. In comparison, Bitcoin's growth sits at around 80%.

They provide exposure to the crypto world but are also tied to the broader stock market dynamics. This means they can benefit from both the bullish momentum in crypto and any positive shifts in the traditional equity space. Additionally, companies like RIOT and MSTR have strategic investments and operations in the crypto domain, allowing them to potentially leverage growth opportunities more effectively than just holding the cryptocurrency outright.

For investors who might be risk off to the direct volatility(lol where's the volatility, but this is what the normies are worried about) associated with holding cryptocurrencies or those who prefer assets within regulated stock exchanges, such stocks present a more familiar and potentially diversified entry point into the crypto world. As this is no promotion to go buy stocks or these ones that are already up 300% on the year, it is just something to consider and think about. If you want to chat more about this, send me a DM or come up and ask questions in our biweekly Premia x Marty Spaces.

That wraps up our Marty X Premia Monday Alpha #5. Lets recap.

• Volatility seems at a pivot point as we come up on ETF decisions and the BTC halving

• Prices have stalled around $30,000 BTC and $2,000 ETH, with volatility down and to the right

• Areas of interest 29-32k BTC, 1800-2000 ETH

• Institutional Players are favoring Long Dated Call Spreads, with short-dated put protection

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