Research Summary
The report discusses the recent rally of Bitcoin to around $40k, the impact on implied volatility (IV), and the strategies employed by traders. It highlights the lack of expected IV increase, the crystallization of exits on long-held Dec Calls at 40k+42k, and the subsequent gifting of Gamma to dealers. The report also notes the rolling of Jan42k Call to Jun60k Call and the purchase of Dec45k and Dec50k Calls as Bitcoin surpassed $41k.
Key Takeaways
Bitcoin’s Rally and Impact on Implied Volatility
- Unexpected IV Behavior: Despite Bitcoin’s rally to around $40k, the breach did not result in the anticipated increase in implied volatility (IV). Instead, the opposite occurred, with long-held Dec Calls at 40k+42k crystallizing exits and gifting dealers Gamma.
- Volatility Path: The volatility path to $40k did not meet the expectations of longs. A fairly constant volatility with frequent spot pull-backs dashed hopes of explosive IV reactions. This likely led to frustration among holders of long-held 40+42k Calls.
Trading Strategies Amidst the Rally
- Call Rolling and Purchases: As Bitcoin surpassed $41k, the Jan42k Call was rolled to the Jun60k Call. Additionally, traders bought Dec45k and Dec50k Calls, taking advantage of the dampened IV.
- No Sign of Rolling Exposure: Despite the exits crystallized by the breach of $40k, there was no sign of rolling exposure. However, as the spot rallied strongly towards $42k, funds bought Sep40k, Dec45k, and Dec50k Calls, and another to take profit on the Jan 42k Calls while maintaining optimism by rolling up and out to the Jun60k Call.
Market Reactions and Position Bias
- Spot and Vega IV Discrepancy: While the spot was following the plan, hitting and challenging the 69k-15.5k 50% fib at 42250, Vega IV refused to join the party, with only near-term Gamma reacting to any degree at all. This confirms a well-telegraphed, expected, risk-managed move.
- Two-Way Flow and Bullish Position Bias: The flow is now two-way, indicating a bullish position bias. This suggests that traders are expecting the price of Bitcoin to rise in the future.
Actionable Insights
- Monitor Implied Volatility: Traders should keep a close eye on implied volatility (IV) as it may not always react as expected to price movements. This could impact trading strategies, particularly those involving options.
- Consider Rolling Strategies: The report highlights the use of rolling strategies in response to price movements. Traders might want to consider such strategies, particularly in volatile markets.
- Assess Market Sentiment: The report suggests a bullish position bias. Traders should assess market sentiment and consider it in their trading decisions.
