Markets saw a relief rally last Tuesday with BTC climbing to 44,776 and ETH touching 3,199 highs.
However, selling pressure quickly resumed, on the back of increasing Fed hawkishness and negative headlines out of Ukraine. BTC has since traded to 37,215 lows today and ETH to 2,575 yesterday. A large weekly range.
Vols have naturally inched higher over the week given the sharp dip in spot. BTC 1-month implieds from 57% to 65% and ETH from 69% to 79%. (Chart 1)
In spite of this, we’ve been seeing aggressive vol selling with every spike. Our sense is that selling vega (longer-term options) at these levels is the right trade.
While spot swings in the short-term from Russia-Ukraine or Fed headlines are to be expected, we don’t think that spot prices will crack just yet. Two reasons:
1. A good portion of the leveraged longs have been taken out with funding rates relatively flat.
2. An aggressive Fed hiking schedule has been priced in by the market.
We think it will be more of a grind lower with the possibility of short-squeezes on positive headlines. These spikes in spot price would probably be met with aggressive spot selling, capping the topside.
We have turned nett short vega on this vol rally while keeping neutral gamma (short-term options) and long on the wings (far strike options) for protection.
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Part of our short vega conviction was formed by some interesting findings from our Quant team.
The data shows that short vega in BTC and ETH has been the winning strategy of the last 6 months.
The GIFs below (Chart 2 & 3) play out the changes in the implied and realised vol curves over the last 6 months. In that time, implieds have traded at a material premium over realised vol, across all tenors with very few exceptions.
We made some modifications to the typical implied and realised vol data for this piece of analysis.
Typical implied vol is forward looking while realised vol is historical and backward looking. This means that comparing the two does not accurately indicate if the strategy is actually profitable due to the time period mismatch.
Instead we used lagged variance swap price (“Sqrt implied variance”-black) versus the forward vol (“Clairvoyant future realised vol”-blue) for a better comparison.