Research Summary
The report discusses the recent inversion of the term structure of ATM volatility in the options markets for Bitcoin (BTC) and Ethereum (ETH). It highlights the shift in the market’s expectations for volatility following the ETF application event risk, and the increased demand for downside protection. The report also notes a shift towards more bearish positioning in the options markets.
Key Takeaways
Inversion of Volatility Term Structure
- Change in Volatility Structure: The term structure of ATM volatility has inverted, taking a different shape from the one it had since the ETF application event risk was first known. This suggests a change in market expectations for future volatility.
- Decrease in Volatility Levels: Volatility levels across the smile have fallen, and smiles at all tenors are skewed towards OTM puts, indicating a longer-term demand for downside protection following the expected announcement date.
Market Expectations for BTC and ETH
- Inverted Term Structures: The ATM term structures for BTC and ETH are inverted, with each term structure falling by 5% since January 7th. The level of inversion has moderated as the front end of the term structure has fallen further.
- Expectations for ETH: ETH markets price for a high level of volatility at later tenors, implying that the market expects to see shared volatile reactions to the ETF with a more volatile path for ETH in the months to follow.
Event Risk and Volatility
- Event Risk Impact: An inversion in the volatility term structure is expected when there is a known event risk like the deadline for ETF application responses. However, until recently, this event risk manifested as a step-jump in the term structure at the tenor closest to mid-January.
- Change in Volatility: Now, expiries later than the event are much lower after short-tenor vols continued to rise and longer-term optionality stayed level. The report questions why this inversion was not seen as soon as the date was known and why volatility at longer tenors no longer matches vols at the January expiry.
Bearish Positioning in Options Markets
- Shift Towards Bearish Positioning: The skew of both BTC and ETH’s volatility smiles has swung strongly towards puts, indicating a shift in options markets towards more bearish positioning. This shift is not limited to the 1-week tenor and appears to extend much further across the term structure.
Actionable Insights
- Monitor Volatility Levels: Investors should keep a close eye on the volatility levels of BTC and ETH, as the recent inversion of the term structure could indicate a change in market sentiment and expectations for future volatility.
- Consider Downside Protection: The skew towards OTM puts suggests that there may be a longer-term demand for downside protection. Investors might want to consider this when making their investment decisions.
- Assess Market Expectations: The report suggests that the market expects a more volatile path for ETH in the months following the ETF announcement. Investors should assess these market expectations when considering their investment strategies.
