Out of the summer reverie and into crypto vol trades
Opportunities abound as implied volatilities crash to historical lows
- After the initial euphoria from Blackrock et al. filing for spot ETFs which drove prices to 2023 highs, markets continue to undergo a period of consolidation with a downward bias as market awaits the next catalyst
- Last Friday, the SEC delayed its decision on whether or not to approve Cathie Wood’s Ark 21Shares Bitcoin ETF (SEC delays decision on bitcoin ETF from Cathie Wood’s Ark invest) as expected, but it fuels the market’s restlessness as we await the next set of potential approval dates in September
- We are quietly confident on the probability of a successful spot ETF application given Blackrock’s impressive record (Blackrock’s record of ETFs approved by the SEC is 575–1), however, of much lower certainty is the timing of such approval which could happen as early as September (highly unlikely in our view) or as late as March next year
- Consequently, we have seen a collapse of both the implied and realised volatilities of BTC & ETH, with BTC trading within a tight range of $28,475 — $30,400 over the past month and ETH trading within an even tighter range of $1,800-$1,905 in the last three weeks
- Year-end ATM implied vol has dipped to below 40% for both majors while shorter-dated implieds have seen even lower levels, thus investors who have performed well via traditional vol-selling structured products for most of the year are now seeing diminishing returns on the same structures
- While traditional vol-selling products are looking less attractive, the current environment offers the ideal conditions to switch gear and start allocating into long-vol strategies, a handful of which we will outline below
- Year-End 2023 BTC Call Spreads
With the view of taking advantage of the low implieds in Dec and a bullish view on BTC prices at year-end (e.g. ETF approval to take prices to $40k+), a call spread offers a cost-effective way to gain upside exposure:
BTC Spot Ref $29,400
29-Dec-2023 $32,000/$40,000 Call Spread
Premium: $1,650
Maximum Net Profit: $6,350 (if BTC closes ≥$40,000 on 29-Dec)
Payoff Ratio: 3.85x
2. BTC March 2024 Call Spread
For those who believe December may be too aggressive in terms of timing a spot ETF approval, March 2024 may be a more ideal expiry, aligning with potential Fed monetary easing in 2024 (or talk of such action) and closer to the 2024 BTC halvening event
BTC Spot Ref $29,400
29-March-2024 $35,000/$50,000 Call Spread
Premium: $2,100
Maximum Net Profit: $12,900 (if BTC closes ≥$50,000 on 29-March-2024)
Payoff Ratio: 6.14x
The idea behind both of these call spreads is to risk a pre-defined amount of option premium to gain exposure to a potential explosive move to the upside with a spot ETF approval providing the possible catalyst to rapidly catapult BTC towards cycle highs
The next strategy has been popular with our more conservative clients, who are keen to gain some upside exposure, without taking any risk on principal
3. Principal Protected Upside Strategy
BTC Spot Ref: $29,400
Expiry: 29-Dec-2023
Strike Price: $32,000
Participation Rate: 15%
In this strategy, the client will receive 100% of their invested notional if the price of BTC closes ≤$32,000 on 29-Dec-2023. In other words, no loss will be suffered if BTC either goes down or fails to rally above the Strike Price.
However, if BTC closes >$32,000 on 29-Dec-2023, client will receive 15% of the upside performance above the Strike Price.
This is a highly attractive payoff for many clients who find timing an entry level difficult and are reluctant to be exposed to the downside risks of a relatively new asset class. Variations to the structure are available, so as usual, speak to your friendly TDX contact.
4. Downside Protection
Whilst most clients share our longer-term bullish view, many already have a substantial core holding of crypto and regularly look for ways to protect against drawdowns. The low implied vol environment also provides opportunities for clients to implement low-cost downside protection, providing peace of mind to HODL onto their core holdings.
Needless to say, these are just some of the structures that are available and there are of course more exotic/exciting payoffs which are exclusively available to our clients, so don’t hesitate to reach out to TDX, a licensed provider of digital asset derivatives and structured products (TDX Strategies obtains Investment Business License)
