Market Update: End March 2021

This month’s major move has been the volatility crush we saw into the big March quarter-end expiry on Friday, with 1m ATM implieds falling from well over 100% to just 65% now (Chart 1). This largely tracks the collapse in daily realized vol, as the consolidation in spot stretched into the expiry (Chart 2).

March’s expiry was the largest on record with a $6bn notional OI, and with a lot of positions well ITM/OTM much of them were rolled in advance — resulting in the high volume vol selling the last few weeks (Chart 3).

The market’s huge long gamma position also kept spot heavily pinned — and case in point following Friday’s expiry we saw the largest daily price gain since the 1st March bottom.

Outside of the massive option expiry spot pinned, the low volatility was also due to the lack of new developments/catalysts in the space recently — forcing BTC to move in tune with the larger macro markets as a whole, most of which has been treading water since the FOMC meeting 2 weeks back (Chart 4).

We think this is likely going to change now, and with the March expiry out the way we are positioned bullishly — mainly through short puts currently amidst the vol sell-off. We’ve been highlighting the strong Q2 seasonality, and last week’s bounce off the parabolic trendline again is setting itself up for another strong Q2 (Chart 5) — with the coast much cleaner now from the perspective of the derivative leverage market.

In our development projections, the participation of Sovereign wealth funds were the catalyst to come after Fortune 500 companies — and there were murmurs of this last week. Although we think its unlikely Temasek will come out to confirm (or deny) anything, the stage has been set for some SWF announcement this quarter that will drive the next leg higher.

We see many similarities between the Feb consolidation and this current one, with the end-Jan & end-Feb bottoms eerily similar to last Friday’s one, along with the narrative playing out in close parallel. The pattern this year has been a strong rally following the month-end expiries every month, and likely no different this time as well.

$60k on BTC and $2k on ETH remain key hurdles, but the difference between now and Jan/Feb is the level of implied volatility — where we can now look to chase a $60k breakout with long calls, before later turning them into spreads as we expect $80k to hold out through the quarter irregardless.

The ETHBTC cross has been hanging onto the long-term trendline very optimistically throughout the month (Chart 6), and our favorite trade now is ETH end-June calls, in preparation for July’s EIP-1559, and as the ETHBTC 1m & 3m implied vol spread continues to revert to the very strong long-term parity level (Chart 7 & 8).

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