Quick Market Update: 27 Nov 2020
Quick update to our previous posts here.
Thanksgiving + OKEx gave an early taste of the demand/supply dynamics we were alluding to before. With buying demand primarily stemming from the US, whenever they are out (weekends and US holidays) the bid side thins out dramatically and the usual consistent TWAP buy flow disappears, leaving the market vulnerable. This time with the Chinese side unfreezing accounts creating supply in the market to create a perfect storm (Chart 1).
Despite the $1 billion of liquidations yesterday, leveraged dip buyers were still out in force. This meant even after the manic 100–200% annualized perp funding we saw earlier this week, and despite the liquidations & magnitude of yesterday’s move, funding levels still remain elevated (Chart 2).
Gamma was bid yesterday as expected, although option flows were extremely muted considering the spot move. Longer-date implied vol however was stable and even falling for periods yesterday and the vol term structure is flat like a pancake (Chart 3). The put-call skew saw the most movement, reversing sharply from the record lows we highlighted earlier (Chart 4 — Puts becoming more expensive than calls). Looking at the stability of the back-end vol term structure — we continue to like selling vol on both sides, now dipping our toes back into further out puts at 10,000 and 12,000 with the increasingly favourable put skew.
Our parallel BTC tracking Gold (with a lag) is playing out well — if this continues to hold then we should have a consolidation descending triangle similar to after the 2017 BTC bull run (Chart 5). This BTC price reversal into our “TD Royal Flush” window also lined up perfectly with the Gold top.
Finally we’re getting wary of the year-end expiry — with CME’s happening on Christmas eve & Deribit and the rest on Christmas day. Of course a lot can change in a month, but if the thanksgiving long weekend liquidity could result in a move like this, we worry what the Christmas long weekend expiry would look like. Any regulatory news out of the US (many related to Coinbase lately), including Grayscale or Biden’s CFTC pick would be key to guide the market in the new year.
Sunday could get more liquidations before US comes back in earnest on Monday. We’re watching closely to see if these first US flows early next week/month see this as the dip to be bought, or the top to be sold.
