Key Indicators: (Hong Kong time October 14, 4 PM -> Hong Kong time October 21, 4 PM):
BTC/USD +6.6% ($64,250 -> $68,500), ETH/USD +7.9% ($2,525 -> $2,725)
BTC/USD December (end of year) ATM volatility -1.6 v (57.5 -> 55.9), December 25 d risk reversal volatility +1.4 v (2.9 -> 4.3)
Overview of Spot Technical Indicators
The spot market finally broke through the long-term flag pattern resistance last week, entering a new price range of $67–69.5k. As the election situation changes, the market has begun to position itself for Trump-related trades.
Currently, the $70k level constitutes very strong resistance. The price uptrend is relatively modest (with low actual volatility), and we expect this situation to continue in the short term. If the price breaks through $70.25k (then $72k), the spot market may welcome a significant rally. Conversely, if it falls below $63.75k, it may trigger a sell-off in the spot market, with prices retreating to $60k and accompanied by greater volatility.
Major Market Events:
The long-awaited 'Uptober' rally has finally begun, with the probability of Trump being elected rising, combined with strong overall performance in Q3 U.S. earnings (as well as retail sales data), and the Middle East tensions not escalating further, market risk sentiment has improved.
From a technical perspective, as the market broke through the resistance of the $66.5k - $67k price range, we expect bullish price trends to continue in the short term. At the same time, ETF inflows have increased, and performance across asset classes has also boosted this rally, with the exchange rate of gold against fiat currency rising to a yearly high, and the SPX index also reaching a new yearly high.
Despite the odds for Trump having risen significantly (with a winning probability exceeding 60%), this change is mainly driven by a few large individual bets. The polling odds remain stable around 50/50, which means we need to be cautious about the market's anticipatory positioning for Trump's victory (with the dollar rising, cryptocurrencies increasing, and U.S. Treasury yields climbing). It is expected that this election will be decided at the last moment, and we may see a pullback in recent Trump-related trades in the coming week.
ATM Implied Volatility:
This week, as spot prices rose and broke through resistance levels, actual volatility increased. However, at other times this week, actual volatility remained relatively subdued, with fixed-term actual volatility around 45 (while the 1-week high-frequency volatility approached 54). Large ETF inflows supported prices during pullbacks, suppressing the decline in actual volatility. Meanwhile, the market seems to be engaging in bullish Gamma trading in high price regions, limiting the rise in spot prices due to Gamma hedging.
Implied volatility failed to maintain an upward momentum after successfully breaking through $67k, with spot lacking follow-up and price trends remaining relatively stable, not creating significant waves in options trading. Additionally, in the short term, the market is primarily enhancing expectations for volatility through ratio call spreads and overlay selling strategies, so despite new demand, implied volatility has not risen significantly.
Last week, the spot market's anticipatory positioning for Trump reduced the demand for event 'tail hedging', resulting in a decrease in the pricing of election volatility. However, considering that polling remains close to 50/50, we believe the market reacted too early based solely on the odds. With the intraday breakeven point below 5%, and the probability of a Republican sweep increasing, we find it worthwhile to hold options positions with election expirations. At the same time, in the short term, asset price pullbacks related to Harris may occur very rapidly.
Skew/Convexity:
As spot prices broke through the upper limit of the range, there is an opportunity to set a historical high, causing a sharp rise in volatility skew prices this weekend. However, this is completely opposite to the current correlation between spot and volatility, as we have observed that implied volatility is lower when spot prices rise. Additionally, the changes in volatility skew are not limited to post-election expirations; the volatility skew before the election has also increased, so this change cannot be solely attributed to the 'Trump premium'. We expect that if the odds fall back to the polling level of 50/50, the volatility skew prices will quickly revert.
Although we observed a positive correlation between spot and implied risk reversal this week, convexity trading remains stagnant. We attribute this phenomenon to the large number of options contracts still at the market wings between $100k and $120k, as well as insufficient demand for tail hedging from end users.
Wishing you successful trading this week!
