Research Summary
The report analyzes the recent changes in Bitcoin’s volatility smiles, focusing on the 1-month and 2-week tenors. It discusses the flattening of the volatility smiles, the increase in the ATM level of implied volatility, and the rise in the implied volatility of short-dated OTM calls.
Key Takeaways
Flattening of Bitcoin’s Volatility Smiles
- Observation of Flattening: The report notes a swift flattening in Bitcoin’s volatility smiles, first at a 1-month tenor and then at a 2-week tenor. This flattening is attributed to the recovery of short-dated OTM calls to the level held by OTM puts.
- Dislocation Speculation: The report speculates that the flattening could be a dislocation caused by the recovery of short-dated OTM calls, following a strong skew towards OTM puts observed before the spot market selloff that began on December 4th.
Changes in the Steepness of Volatility Smiles
- Decrease in Steepness: The report observes a significant decrease in the steepness of the 2-week tenor over the last five days. This is unusual as shorter-dated tenors typically exhibit steeper wings.
- Dislocation between Tenors: The report notes a potential dislocation between the 2-week and 1-month tenors, as the flattening has not been observed at other tenors.
Changes in Implied Volatility
- ATM Level Increase: The report notes an increase in the ATM level of implied volatility, while the implied volatility of OTM puts has remained level. This has contributed to the flattening of the 2-week volatility smile.
- Rise in Short-Dated OTM Calls: The implied volatility of short-dated OTM calls has risen at a similar rate to the ATM level, retracing the strong skew towards puts observed before the December selloff.
Expectations for the Future
- Expectations for the 1-Month Tenor: The report suggests that the 1-month tenor, which now covers the January 12th expiry expected to see much of the anticipated ETF action, could see the volatility smile grow steeper as uncertainty builds around the event.
- Continued Premium for Later Expiries: Despite the increase in 2-week volatility, the report notes a continued premium of around 6 volatility points assigned to expiries later than January 12th.
Actionable Insights
- Monitor Short-Dated OTM Calls: Given the recent recovery of short-dated OTM calls to the level held by OTM puts, it would be prudent to closely monitor these calls for potential market shifts.
- Assess Impact of ETF Action: With the 1-month tenor covering the January 12th expiry expected to see significant ETF action, assessing the potential impact of this event on Bitcoin’s volatility could provide valuable insights.
- Consider Premium for Later Expiries: The continued premium assigned to expiries later than January 12th suggests that these later expiries could offer potential opportunities for traders.
