Research Summary
The report discusses the recent shift in short-tenor Bitcoin (BTC) volatility smiles towards out-of-the-money (OTM) puts, indicating an increased demand for puts. This could suggest speculative bearish bets or traders seeking to profit from their long spot positions or protect against interim retraces of the recent rally. The report also highlights the rise in implied volatility of OTM puts, suggesting a substantial increase in the premium assigned to downside protection.
Key Takeaways
Shift in Short-Tenor BTC Volatility Smiles
- Increased Demand for Puts: The report notes a significant shift in short-tenor BTC volatility smiles towards OTM puts over the last two days. This shift is attributed to an increase in the relative demand for puts, rather than a decrease in long positions. This could indicate speculative bearish bets or traders looking to profit from their long spot positions.
Decrease in ATM Volatility
- Drop in ATM Volatility: The report observes that the at-the-money (ATM) level of volatility priced by the market over the next week has fallen by approximately 2.5% vol points. However, the volatility of OTM puts remains high into the year-end, indicating a continued demand for downside protection.
Increased Demand for Short-Term Downside Protection
- Hard Skew Towards OTM Puts: The report highlights a hard skew towards OTM puts, largely attributed to the increased demand for short-term downside protection. This is not due to a significant fall in demand for OTM calls. The implied volatility of OTM puts has risen to 110% of the ATM level, suggesting traders are looking to protect against any fall in spot price ahead of January’s expected bullishness.
Rise in Implied Volatility of OTM Puts
- Increased Downside Protection Premium: The report points out the rise in implied volatility of OTM puts over the last two days. While the outright level of implied volatility is broadly similar, the premium assigned to downside protection relative to the rest of the market has risen substantially. This could echo similar sentiments in equity markets that the recent rally has over-run.
Evolution of 1-Week Volatility Smile
- ATM Level Drop: The report shows that the 1-week volatility smile’s ATM level has dropped slightly. However, the implied volatility of OTM puts has risen, highlighting the increased demand for downside protection.
Actionable Insights
- Monitor Short-Tenor BTC Volatility: The shift in short-tenor BTC volatility smiles towards OTM puts suggests an increased demand for puts. Traders should monitor this trend closely as it could indicate potential bearish bets or profit-taking strategies.
- Consider Downside Protection: With the hard skew towards OTM puts and the rise in implied volatility of OTM puts, traders may want to consider strategies for downside protection, especially in anticipation of potential price drops.
- Assess Market Sentiment: The increased premium assigned to downside protection could reflect broader market sentiment. Traders should assess this sentiment in their decision-making process, particularly in relation to the recent rally and expected bullishness in January.
