By @foreignative
As we prepare to draw the curtain on what has been yet another volatile year, we would like to briefly review Vol action over the last 12 months, touch on recent holiday price movement and ponder how the industry may evolve going forward.
BTC has seen an incredible 140% peak to trough move YTD coupled with a 1yr realised Vol of 86% whereas ETH saw an eye watering 450% peak to trough with 1yr realised sitting at 110% at time of writing. Despite the fact that the Implied/Realised Vol spread has faced serious compression in ETH, Implieds continue to remain buoyant over Realised across most tenors. Contrast this with 1yr IV in both crosses which having now been supplanted by RV, seems intent on finding the basement — BTC, which peaked at 110% in Jan, has since shimmied lower and is venturing into the 70% region. Based on prior price action, picking up vol at anything in the 60% region might prove an astute long-term play if timed correctly. (Fig. 1)
Quite predictably, as price action in BTC pipped through 52k, we saw a marked pickup in upside exposure across the curve as Open Interest leaned green. However, as price action has since taken a ‘light knock’, we’ll be tracking OI change to see how attuned or apathetic sentiment is on direction. Complementary to the premise that this may prove just a blip is the fact that while Funding Rates have receded, they have not done so aggressively and remain neutral across major CEX (Fig. 2 and Fig. 3)
A cautionary note on the vol environment going forward; we’ve recently witnessed the advent and proliferation of DOVs (DeFi Options Vaults). In short, these are scripts that automate the selling of options on a recurring basis in order to generate yield. For now, market convention is weekly short Vol plays with capped risk (Covered calls and Secured Puts). No doubt these products are set to evolve and granted these are primarily Gamma plays but for the time being as TVL continues to climb, and unless or until we see scripts that long Vol, these weekly recurring strategies could trigger a change in Vol regime towards the near end of the curve as Vol gets sold routinely in apparently ever-increasing volume. Across just 3 DOVs, TVL already stands at USD +672mio (Ribbon Finance, Opyn and Lyra). Granted this is paltry in comparison to Defi as a whole but this niche is one we plan on watching closely. (Fig. 4)
Points of interest in this space: 1) Deepening liquidity on the back of MMs hedging exposure 2) An increase in asset variety i.e. ALTs — what are the implications on vol in these crosses? 3) Will the tail begin to wag the dog as hedging concurrently larger exposures cause options to largely influence underlying supply and demand, especially in thinner ALTs markets? Regardless, the party that will succeed is the one that makes an asset agnostic platform with a robust infrastructure capable of internalising liquidation events.
Another point of note is the expansion of the ‘self-execution’ space, à la Deribit. We’re seeing new names come to the fray, for example Power Trade has begun offering options in ETH and BTC. Bybit recently announced plans to do the same and while on the surface, Delta.Exchange have a fantastic concept with a wide suite of offerings, their execution is somewhat lacking. Hopefully this is tightened up and basic functionality like cross-asset margining is introduced. If so, they stand to be a prominent player going forward. With so many exchanges expanding their offering beyond Delta 1 products, it stands to reason we should expect increased volume and activity, more competitive pricing, new products and a plethora of venues for trade execution, all of which will be collated, analysed and presented by your trusted team here at Laevitas.
The views and opinions expressed above are purely those of the analyst and do not necessarily reflect the views of Laevitas.
For further discussion please feel free to reach out on Telegram @foreignative
