25 Oct 2022

Straddles are becoming cheap

Weekend volume in futures and perps hits 1-year low, while open interest remains stay near all-time highs. Meanwhile, IVs are pushing towards two-year lows
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Futures premiums stay flat, with no noteworthy changes from last month. The market is remarkably drowsy with no momentum. This has been reflected in low trading volumes. Per Laevitas, this weekend saw the lowest daily trading volume in offshore futures in the past 365 days.
Source: Skew, Laevitas, Tradingview, CME *Closed Saturday-Sunday
Last week saw no inflows nor outflows to BITO and very stale flows into the short BTC ETF BITI, further illustrating the low activity in the market. This week, U.S. BTC ETFs will roll over their October exposure.
Weekend volume in perpetual swaps hits 1-year low
Funding rates have mostly trailed below neutral in the last week.Perps stay flat this week as activity is falling. Similarly to what we saw in futures, this weekend saw the lowest trading volume in BTC perps in the last 365 days.
Source: Bybit, Binance, Tradingview (Coinbase)
Open interest is still near all-time highs but has seen a slight decline to 490k BTC this week. Traders seem to maintain open positions, while few seem willing to open new positions. Summarized, neither futures nor perps offer any directional clues, and market activity has dwindled. Open interest remains concerningly high and will likely exaggerate volatility once BTC finds substantial momentum.
3-month IVs pushing towards 2-year lows
Source: Skew, Laevitas
The non-existent volatility in bitcoin of late has been reflected in options, as implied volatilities (IVs) are pushing lower, leading volatility-based trading strategies to become cheaper. Straddle strategies in further dated options expiries are an interesting trade given the prevailing market conditions. The 3-month IV sits presently below 60, near 2-year lows. In October 2020, IVs trailed at current levels for 1.5 months before volatility again pushed higher. In our opinion, in the current ambiguous market, dollar cost averaging and straddles represent the two soundest methods for approaching the directionless crypto market.
Massive growth in FTX’s ether perp in negative funding environment
Hedging or naked shorting?Open interest in the ether (ETH) perp on FTX surged by 48% since the merge.
Source: Laevitas
Since the Ethereum merge, FTX’s ether perp have seen surging open interest in a negative funding rate environment, suggesting shorts are the key aggressor.Open interest on FTX’s ether perp spiked in early October as funding rates reached deep negative levels. Since, open interest has stabilized while funding rates have normalized.From September 1st, FTX’s market dominance in ether perps has increased from 25% to 30%, leading FTX to approach and temporarily surpass Binance’s ETH perp open interest.
Source: Laevitas
The spiking open interest on days with deep negative funding suggests that growth is driven by shorts, either pure-play naked shorting or hedging related. We view hedging as the most plausible explanation. One example of entities that might be looking to hedge in size in the current market is FTX themselves. The FTX acquisition of Voyager is making progress, and per the bid, FTX will recover 72% of the crypto held by Voyager uses before the bankruptcy filings. This is a large transaction, and FTX might be hedging in advance of this.
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