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Disclaimer: Nothing here is trading advice or solicitation. This is for educational purposes only.
Math minded people here, pardon any typos.
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THE BIG PICTURE THEMES:
Besides Tech earnings, this week’s big US headliner is the FOMC on Wednesday at 2pm ET and Jerome Powell’s press conference after, at 2:30pm.
In the realm of macro TradFi, I continue to hold the theme of “seller fatigue, lower IV and higher equity indexes” in the short-term.
FOMC could set-up like CPI’s recent release… weakness into the # and strength and recovery post. This is the trading theme I’ll keep in mind.
VVIX continues to flirt with the lows… while VIX futures are holding an extremely rich front-month.
My bias is a massive vol. smash in August, should the Fed raise by 0.75bps.
Crypto Theme
Crypto has found some footing.
I don’t expect a bull-market to necessarily resume. I think prices are more likely to have found a near-term bottom while currently finding a near-term top, thinking 2k-2.3k for ETH… (Something like that… those are just random numbers but I expect price action to display changes at similar higher levels).
As I explained last week and on Thursday’s Coindesk.TV appearance, I believe 2018 is a good model for 2022.
This means we’re likely headed for a substantial consolidation period in the medium-term, after this short-term relief rally.
Long-term, I’m staying open to prices below 2022 lows.
BTC: $22,721 +6.88%
ETH :$1,605 +14.31%
SOL: $40.92 +1.23%
DVOL: Deribit’s volatility index
BTC - (180-days w/ spot line chart)
I’m sticking to my DVol range.
65% to 85%… Right now, we’re at the top of the range, as prices move higher in an explosive fashion.
BTC is likely being brought higher on the back of ETH 2.0 developments + natural relief rally.
Once the short-term high is found… - $30k is significant- I believe spot prices will have established a range… and IV will quickly head towards the 65% DVOL level.
TERM STRUCTURE
(July 17th, 2022 - BTC’s Term Structure - Deribit )
BTC (gvol API python module, pre-built notebook charts )
ETH (gvol API python module, pre-built notebook charts )
SOL (gvol API python module, pre-built notebook charts )
We’re seeing a mostly “flat” term structure, with short-term vol. in Backwardation.
ETH is leading the way, with good reason. I wouldn’t stand in front of the ETH train.
SOL - having a small market-cap- could see something similar in the near term.
BTC having the biggest mcap and no clear “developer catalysts” is likely the best “Return to Contango” bet instrument to keep an eye on.
SKEWS
(July 24th, 2022 - BTC’s RR SKEW (C-P) - Deribit)
RR-Skew is trending higher but can’t get over the “0” line.
There might be a structural shift for bidding put-skew (where in the past, calls have always been more expensive).
Structural arguments aside, the market could still be so “shocked” from the recent Luna and 3AC events that funds and traders are “paying-up” for protection.
In the later case, the put-skew juice is still there to be squeezed. That has been my personal bias in the last few newsletters.
Thinking back to March/April 2020 Covid shock… VIX remained stubbornly elevated throughout the subsequent equity index recovery.
PROPRIETARY “GVOL-DIRECTION” FLOWS - @fb_gravitysucks
Index prices this week tested recent relative highs, with Ethereum leading the mood with encouraging news from the devs on the upcoming merge.
Ethereum’s lead was also felt on the options' flow, where the December flies dominated the scene: first on Ethereum $2.5k/$3.0k/$3.5k and then on Bitcoin $40k/$45k/$50k.
The general sentiment is that of moderate enthusiasm from September onwards: $25k strikes bought, bullish risk reversal -$18k/+$30k and long calls $38k/$40k/$45k in March 2023 for Bitcoin, call spreads bought SEP $2.5k/$3.0k and DEC $2.6k/$3.0k per Ethereum.
More complex to decipher: the frantic activity on 29JUL where we saw some profit taking with spot at $23.5k/$1.5k and wider two-way interest in near-ATM strikes.
Despite the positive price action, this week’s FOMC meeting is an element of uncertainty that will dominate trades over the next few days.
I remain of the opinion that a rich activity on the front part of term structure can continue and create interesting trading opportunities during the event.
(18th Jun - 24th Jul, 2022 - BTC/ETH GVOL Gravity charts - Deribit)
For further discussion on the GVol proprietary direction, please see the interview with @fb_gravitysucks and Imran, below!
VOLUME
(July 24th, 2022 - BTC Premium/Contracts Traded - Deribit)
Paradigm Block Insights (18 July – 24 July)
ETH led majors higher again this week. Strong topside bid continues, following healthy upside flows late last week on the ETH ‘merge’ news.
BTC +5% / ETH +8.6% / SOL +1.9%
29Jul is the highest point on the vol term structure, given FOMC next week.
If a 1% rate hike does not occur, we expect the curve to significantly normalize following the press conference.
29Jul: 85.5
Aug: 78.7
Sep: 74.8
Dec: 72.6
Mar: 72.0
We believe ETH spot has run away from a significant portion of dealer short gamma from last week's large call buying.
Most call activity occurred in 1300-1450 strikes, so perhaps we do not see the choppy spot action into FOMC that we previously anticipated.
BTC Flows
Large upside blocks dominated the BTC trade tape this week.
2000x CFly 30Dec 40k/45k/50k bot
500x CFly 29Jul 26k/28k/30k bot
500x CSpd 29Jul 25k/28k bot
ETH Flows
ETH 25d skew traded negative at the start of the week (calls over), given the spot rally and large upside buying.
Clients took advantage of flat skew to buy call spreads in large size.
15k CSpd 30Dec 2600/3000
10k CSpd 30Dec 2500/3000
10k CSpd 29Jul 1700/1900
We also saw some of our largest ETH call fly prints ever, with the following structure trading 70k times on Paradigm over the week!
70k CFly 30Dec 2500/3000/3500 bot 🔥
That is 280k ETH options! 🦣
SOL Flows
We had our largest contract week in SOL to date! Nice to see liquidity improving in this new market! 🚀
Notable SOL flows on Paradigm:
25k CSpd 30Sep 70/80 bot
20k Put 26Aug 36 sold
BTC
ETH
SOL
Feel free to contact us at https://t.me/tradeparadigm & follow us at @tradeparadigm on Twitter to access the best pricing and liquidity for large trades in crypto derivatives.
VOLATILITY CONE
(July 24th, 2022 - BTC’s Volatility Cone)
(July 24th, 2022 - BTC IV-RV)
Short-term RV (7-day, 14-day) moved higher on the back of the recent rally.
The VRP is pretty tight (basically 0).
Squeeth Weekly Review
A 41-year high CPI print was the catalyst needed to ignite a monster rally in ETH. oSQTH was no different, closing the week +37%.
Volatility
This week presented very unique opportunities for the savvy vol trader. SQTH IV was significantly lower than DVOL for most of the week and continued to price 113 DVOL vs. 93% SQTH IV at the time of writing.
Volume
Volume peaked on July 19th, with historically high daily volume. The rest of the week volume slowly declined back to relatively normal levels.
Crab Strategy
Crab performed multiple hedges this week equating to 833.4674 ETH.
Great issue thx for the insight! By vol smash post FED 0.75 basis hike you mean smash up or down? I see a cooling if it's 0.75 as opposed to the consensus 1.00 - but could it go higher on general unsettled reception of another hike regardless of 0.75 or 1.0 ?