Week Ending Oct 11
Coinshares reports that there was $5 million notional of outflows from digital asset investment products last week. However, the majority of it was from short investment products. Let’s hope that is bullish rather than a signpost for apathy.
This is not a volatility smile for an individual month. This is the term structure of ETH at-the-money voltality. The vol trader is riding the curve down the back side of post-CPI humped vol. One of the interesting aspects of this chart is that it makes it seem as though the term structure is steep. Ignoring the one week, if we look at October 28 vs March volatility, we can see that 1) volatility has come in a lot over the past week and 2) “vega” months have been hit harder than “gamma” months.
The 5 vol drop in for 10/28 expiration is quite large. The almost 9 vol drop in March vol is eyebrow raising. This is pretty interesting, at least to a propellerhead like myself. Let’s see what happened for BTC vols.
And here are the old and new ratios of volatility:
Here is ETH options open interest:
Unfortunately there is not a smoking gun here indicated that the selling was in March. However, 2/3 of the open interest growth in ETH options was in December — not surprising. Presumably market makers and proprietary volatility traders sought to keep things in line and March went along for the ride. So our second double negative is volatility going down and term structure steepness going down “more”.
The bigger question is whether this is an opportunity to buy volatility or if this is part of a larger structural volatility regime change. Last week in “If it ain’t broke .. break it” the idea of the volatility regime change was discussed and what lower might look like plus why. Going back even further to my review of The Volatility Machine by Michael Pettis brings us to the fundamental driver of volatility. Pettis describes emerging markets but his framework is applicable anywhere: traders don’t drive very high volatility, leverage & margin calls do. Whether that was the regular Bitmex swings from a few years ago or massive leverage from our pre-3ACrash time, it is when traders lose control of their positions that very high volatility occurs. I think two key pieces are in play:
Most of the very big leverage is out of the system — for now. It will come back but may take a while.
Implied volatility is decreasing while open interest increases. That suggests market makers / dynamic hedgers are the buyers. Of course, this may be strike dependent based on spreads, but stylistically that is my thought.
So as much as I don’t like it, I think long positions in volatility are going against the tide. There may be some hiccups along the way via news either USD related, rates related, or specific to crypto. That’s my 0.02 vega.
So we had yet another hack. It really does not matter on which chain or why or any of that. The question one needs to ask is “When do we need regulation?” The answer is: when the normal incentives to do the right thing are not there or are perverse. Without real skin in the game for devs, companies, and VC’s when things go wrong, the incentives for rigorous testing are just not there.
Things I’m reading / listening / watching:
ABOUT FREAKN TIME. CFTC Commissioner says CFTC must seek admissions of wrongdoing rather than just pay fines. Hallelujah!
Our prosperity has been based on cheap energy coming from Russia. via Javier Blas from speech of EU diplomat. Agree it is a must read.
Byron Gilliam wrote a nice daily Blockworks email on DAO law.
Does it get any more TradFi than this? BNY dipping its toe into crypto custody. Start looking for the Brooks Brothers sales.
The (organizing) struggle is real. Radreads is my go to; it is an ongoing process. Here is GTD minimized (maybe Leo Barbatua gets it even more simplified).
Tell me (how) I’m wrong,
DISCLAIMER: Do your own research. Nothing herein is investment or trading advice. All information here is given on a best efforts basis and there is no guarantee of accuracy. Digital Gamma or the author may or may not have positions in the assets or their derivatives mentioned herein.
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