January 4, 2023
"The best thing about 2022 is that it's over.”
Finally, 2022 is over. What a brutal year. We won’t waste your time recapping the various implosions of certain institutions and individuals, as this has been well documented by now. Instead, we will say we are looking forward to a fantastic year with you where nothing hurts and everything is beautiful; where markets return to their natural state of Uponly, and I (The Intern) can get back to selling vol without the crippling fear of my portfolio being eviscerated…right?
A Difficult Year
December rounds out a difficult year for crypto and broader markets. Despite the Fed slowing the pace of hikes, continued hawkishness from major Central Banks killed off hopes for a Santa rally and everyone got coal in their stockings. Bah humbug!
Crypto meanwhile consolidated post FTX losses and has been confined to tight ranges as both realized and implied vols drop to the lowest levels of the year and weighed heavy on volumes. With contagion fears high, counterparty risk has been the dominant consideration and so traders reduced risk early in the month, leaving inter-dealer position management to dominate trading into year end.
All eyes this month are on the large end of year expiry in the December 30th tenor. We’re seeing around $2.3B of notional value in both BTC and ETH expiring this Friday, with max pain in BTC at $18,500 and $1,400 in ETH. The put/call ratio for the options expiring in BTC lies around 0.60, with the put/call ratio in ETH around 0.26.
Skew this month in BTC traded much more calmly compared to the blowouts last month. Weekly skew for BTC shows puts trading at around a 14 IV premium, with weekly skew in ETH showing puts trading around a more mild 11 IV premium. Monthly skew in BTC shows a 23 IV premium for puts, with ETH at a 14 IV premium.
Compared to the end of November, front-month term-structure has softened with the ATM Jan 27th expiry in BTC trading at 60 IVs then, and 44.8 IVs now. Further dated term-structure has stayed relatively firm although there have definitely been some very interesting trades going on positioned in the 2H of 2023, although mainly in ETH.
On December 19th, during an otherwise relatively quiet month (other than CPI/FOMC), one participant in the market bought over 90,000 units combined of ETH 31MAR2023 1.8K and 1.9K calls, and sold over 90,000 units of ETH 30JUN2023 1.8K strike calls in large blocks. It’s difficult to understand the position of this player, as this trade risk-wise might be seen as a trade on volatility more so than delta, and had an exposure of over $125K vega. Interestingly enough, this trade seems most profitable in a low spot low vol environment, which although has been observed previously this year, seems far less likely if we were to break in new lows for ETH.
December Content Highlights
Take a look at our most recent podcast episode where we chat with Greg Magadini, Amberdata’s Head of Derivatives. We talk about data-driven approaches to analyzing the options market and discuss which opportunities will be available in the new year.
With widespread uncertainty in the markets right now – and a few big block trades expiring in the second-half of 2023 – take a look at how the Calendar Spread options strategy can be a new strategy incorporated in your 2023 portfolio.
DeFi Options Vaults took off during the bull market as an opportunity to earn a more organic yield on token holdings. Take a look at some of the shortfalls certain products may be exposed to during a bear market, and learn to understand strategies that may be applicable in these dire conditions.
On this episode of The Shift by Paradigm, Sohan speaks with Charles Tan, a portfolio manager at Pilgrim Partners. Charles trades market-neutral strategies with the basis trade being a prime example. We cover Charles’ origin story and his switch from TradFi to crypto, how basis trading opportunities provide opportunities for alpha with minimal drawdowns, the evolution of execution strategies for basis trades, and more!
The end of the year has been met with tightening volumes and lower organic buyside taker demand. CoinDesk featured one of our data sources as their chart of the day where we explain how market makers’ share of crypto options trading volume has increased while hedge funds, family offices, and high-net-worth individuals sit on the sidelines. Take a deeper dive into their article!
The Mob Has Spoken
Of course, the Tweet of the month had to go to CMS intern, who provided the best and most accurate review of 2022.
The Paradigm Team 💜