SignalPlus Volatility Column (20230725): Protective Strategies Gaining Market Attention
On Monday, the economic data released by the United States was mixed. The US Manufacturing PMI for July showed strong performance, recording 49 (+2.7), the highest level in three months; the Services PMI cooled down slightly, declining to 52.4, but still remained in the expansion zone; the Input Prices rose to 50.6, market concerns about inflation stickiness still exist. After the data was released, US bond yields rebounded, with short-term gains larger. The two-year US Treasury yields rose to a two-week high of 4.92%, and the 10-year yields rose to 3.87% intraday, intensifying the degree of 10y-2y yield curve inversion. Considering that the recent economic data seems to have increased the possibility of an economic soft landing, Powell may express a cautious attitude after this rate hike, continuing to observe some potential risk factors that may hinder the decline of inflation, such as labor market and price index trends.
Source: SignalPlus, hot events this week
The cryptocurrency suddenly plunged after yesterday's closing, and BTC fell below 29,000 and stayed around that level today. Today's settlement was at BTC 29,145.61 (-2.3%) and ETH 1,850.64 (-1.3%). This drop clearly hit the confidence of most users in the market who were bullish. The overall Volatility Skew decreased, and the BTC front-end 25-day Risk Reversal Ratio returned to around 0, while ETH fell back into negative territory.
Source: SignalPlus, 25-day Risk Reversal Ratio drops to a one-month low
Source: SignalPlus, implied volatility continues to decline
There is strong selling pressure on the short-term and medium-term (28 JUL 23/4 AUG 23) for ETH, including the 1900-C near ATM and the 2050-C and 1750-P on Wing. Even the far-term options for 29 DEC 23 have a large number of 2000-C and Tail calls being sold. The sharp drop in ETH's IV has pushed its relative vol against BTC to around -2 to -3%. The stickiness exhibited by the digital currency market in recent times has slightly diminished the buying interest for IV, perhaps awaiting further market developments before re-entering.
One major difference on the BTC side is that retail investors in the market have taken more protective strategies, buying intermediate-term Wing 27000/28000-Put at the low point of IV yesterday. The sudden drop after a period of consolidation has indeed served as a wake-up call for many blindly optimistic people, rekindling the need for protection strategies.
Source: Deribit (as of 16:00 UTC+8)
On the block trade side, traders executed two large-scale calendar strategies on ETH. They bought 8,000 lots of Wing's September-end calls and sold two shorter-term calls near the ATM level. One strategy involved buying 8,000 lots of 29th September 23-2100-C and simultaneously selling 4,000 lots of 11th August 23 1900-C and 2,000 lots of 11th August 23 1850-C. The other strategy involved buying 8,000 lots of 25th August 23-2000-C and selling 4,000 lots of 4th August 23 1900-C and 2,000 lots of 4th August 23 1850-C.
Source: Deribit Block Trade
Source: Deribit Block Trade
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