Desk Commentary: Advent Calendars

With just over three weeks left in the calendar year, finish line fatigue has come to pervade the crypto options markets.  Block trade flows have grown sporadic, and notwithstanding a brief tick up in front end gamma on the slide back below 17k BTC, material, incremental demand for local vol of any sort feels apt to be moribund absent a proper range break to the downside.  

In that context, the steep if kinked term structure of volatility adheres to past patterns, with BTC Friday 9 Dec expiries marked near 40, while the following week is marked over 10 points higher in deference to the tandem events of the CPI and FOMC.   

The slide thereafter from June, March and finally into the bonanza end-of-year expiry on 30 Dec tends toward the extremes seen throughout 2022, with 30Dec some 10 vols below 31Mar, which itself sits just 3 vols under 30Jun.  The ether term structure exhibits similar if less exaggerated characteristics owing to gamma’s relatively better performance of late.  

Given this degree of steepness, roll-down comparisons and implicit carry analytics are an instructive exercise as dealers and specs contemplate positioning for year-end and beyond into 2023.  The 10 vol slide in Dec/Mar is, for instance, formidable, and makes holding vega longs mid-curve a painful proposition given that, on a forward-vol basis, btc March IVs are effectively higher than any other point on the curve.  Yet to be outright short vol at these levels with the degree of prevailing uncertainty in crypto markets may in and of itself be an unpalatable proposition.   

In that vein, there were reluctant takers in the Wednesday session when a bid for over 1300 units of March 23,000 strike calls appeared top of book (~$35,000 of vega), which was curiously complemented by a similarly sized offer in 21,000 strike calls, also to tepid reception.  

Hence, the expression of views on curve-driven trades that carry positively may dictate orientation towards more vega neutral structures.  For instance, thoughtful approaches to gain exposure to lower quintile front end vols while exploiting the aforementioned degree of steepness include traditional calendar spreads or, for a nuanced take, calendar flies.

As exemplars, within the last 24 hours, Jan/Mar diagonals printed multiple times in size while a matching Jan/Mar/Sep calendar fly was quoted but did not trade; both structures take into account the aforementioned term structure dynamics in an efficient way.

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