Key metrics: (July 15, 4pm -> July 22, 4pm Hong Kong time):
BTC/USD + 7.0% （$ 62, 840 -> $ 67, 240），ETH/USD + 3.9% （$ 3, 350 -> $ 3, 480）
BTC/USD 12-month (year-end) ATM volatility + 15% (59.5 -> 68.5), 12-month 25-day RR volatility + 40% (5.2 -> 7.3)
Market events:
Trump's assassination attempt boosted his election odds (60% -> 70%)
Trump's continued pro-cryptocurrency rhetoric drives bullish sentiment in the market ("America's first crypto president")
JD Vance Selected as Trump's Running Mate (Pro-Crypto, Anti-Big Tech)
ETH/USD ETF is expected to be launched on July 23
The 2024 Bitcoin Summit will be held in Nashville, with Trump as the keynote speaker. Market rumors of a possible announcement of a strategic reserve of Bitcoin have brought a huge premium in the options market.
Biden drops out of presidential race, endorses Kamala Harris — BTC/USD rises further despite Trump’s election odds falling from 70% to 63% (while Harris’s rise from 19% to 29%)
ATM Implied Volatility:
As bullish sentiment returns, implied volatility moves higher across the board, with a 2024 Bitcoin peak causing a huge premium to be embedded in the BTC$ front curve — the daily volatility gap also reached 7% due to Trump’s keynote (this is reflected in the options expiring on July 27, but can currently be observed in the options expiring on August 2, where this implied volatility has risen from 50 to 67.5)
In the term structure chart, implied volatility is almost all rising, with the ATM implied volatility for September 27 rising from 51 to 64.5, and the year-end ATM implied volatility rising from 59.5 to 68.5.
As prices continued to move higher, realized volatility remained subdued — observed high-frequency realized volatility remained around 43 during this period, while daily volatility was just below 50 during the period.
On the eve of the meeting (July 23-26), there was a significant volatility spread in options expiring during the week, with the uncertainty brought about by the issuance of the ETH ETF being priced into the options expiring on July 24, with a premium of about 4%.
Looking further, we expect the risk premium to continue at least until the meeting. Although there is no upward breakout in the local area, we can still see a small retracement of implied volatility at the local highs.
Supply and demand in the past week have been heavily biased towards the demand side, mainly concentrated in the call contracts from August to September. The market expects that the Bitcoin Summit in 2024 will break the historical high.
Skewness/Convexity:
Volatility skew has increased significantly this week (biased to the upside), reflecting renewed bullishness in market sentiment and a repricing of tail risk premiums influenced by the above narrative. This week, the 25d RR due on August 30 rose from 1.5 to 5.0, and once broke through the local high of 7.0!
Spot and implied volatility are highly positively correlated locally, with implied volatility rising as spot prices rise and falling from local highs when spot prices pull back. While this partially explains the rise in the 25d RR, as noted earlier, realized volatility did not rise significantly during spot rallies, suggesting that the market is pricing in substantial additional premium on tail scenarios of sharp increases, especially exports. BTC has the opportunity to be considered as a strategic reserve.
Since spot prices have reflected the expectation of a strategic reserve announcement at the 2024 Bitcoin Summit, the market may be disappointed if no such announcement is made. Therefore, as spot prices move higher, the short-term risk reversal of the event should weaken (which is indeed what we have observed in the past 24 hours)
Overall demand for options has clearly skewed to the upside over the past week, which has also exacerbated the implied volatility in the skew.
Overall, market demand for options last week was strongly bullish, which also exacerbated the skew in implied volatility.
Over the past week, the convexity of the curve has become flatter than that of risk reversals. The 25-day butterfly premium has moved upward as the underlying volatility has increased.
Despite the extremely high IV volatility we have experienced over the past two weeks, we have observed a strong correlation between risk reversal levels and spot (i.e. risk reversals favored calls when spot prices were rising, and favored puts when it fell to 54k three weeks ago)
Overall, while we continue to observe structural supply to the wing premium for Overlay and Call Spread strategies, this week we observed a higher proportion of Outright transactions (less wing supply)
Good luck this week!
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