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In this week’s edition of Option Flows, Tony Stewart is commenting on The Attack on 30k BTC and much worry on Crypto Twitter.
July 21
After a dearth of activity, the attack on 30k BTC was the catalyst that initiated a surge in Option flow as both Shorts and new Fast money bought the July 23+30 30k Puts.
Much worry on CT however has been levelled at prints in BTC+ETH EOY 65-70% OTM Puts.
Let’s delve further:
2) With near-dated Implied Vol having collapsed from 100% down to 70% on rangebound and lower spot drift, it was natural that hedged Shorts covered to take IV profits, naked Shorts covered to avoid losses, and Fast money bought the cheapest part of the curve.
Near-dated IV rose.
3) Note that longer-dated Implied vols continued to remain under pressure and longer-dated Skews were sub-0 for the Puts, making the case for longer-term bearish bias/concerns to take advantage of 6month OTM Puts.
2.5k 20-24k+10k ETH Dec OTM Puts have been bought.
Response:
4) While large prints in the current depressed volume environment, these purchases were absorbed by one MM seller.
Net delta ~400BTC, ~1500ETH that MM sold to hedge over 3days clips. Vega ~ 60% of ATM strike.
All very manageable.
The MM was aggressive to sell the flow and onside.
5)
Highlighted above the technical reasoning for buying 6m OTC Puts on a relative basis, but this still has to fulfill the Put buyer’s bias.
The most likely justification is a medium-term -ve spot bias or crash protection view.
Why?:
6) If Buyer was imminent bearish, was optimum to buy near-dated near-ATM Puts, low cost, high theta, big delta, high return.
– If Buyer wanted to cover spot longs, a near-ATM strike (maturity dependent on timing), was ideal, either outright or funded via Spread or Calls.
7) The current environment is one of regulatory & macro concerns, so the buyer may be ultimately comfortable in long spot or cash, but need longer-term crash exposure.
These Puts don’t work great on a slow drift lower.; they are also relatively expensive premium being Dec expiry.
8) Therefore:
– given the expense, likely crash Protection rather than punt; punts view logically in near-dated cheap premium Strikes.
– given the Strike, crash rather than drift exposure.
– given the Maturity, a medium-long term view.
This, of course, assumes justified logic.
9) Also the possibility of a structured product that uses 6month 65-70% OTM Puts to hedge/cover exposure.
Also perhaps that Buyer was a Fund buying back a short-vol position or (with OI increasing) entering a new Long.
Many possibilities; it seems disproportionate to overreact.
10) Finally, the IV reaction after today’s bounce off the lows is one where short-dated has not been hit hard and the front part of the term structure remains in backwardation.
This is perhaps ahead of the much-anticipated conf discussion with Elon, Jack (Twitter) & Cathie(Ark).
View Twitter thread.
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