BITO Skew Smiles Again
Crypto Market Week in Review (01 December 2023)
Markets
This week, stock and bond prices continued grinding slightly higher, supported by weak data from Europe, which further bolstered a disinflation narrative. UK PMIs (economic activity indexes) were worse than expected, and inflation in some Eurozone countries declined more than forecasted. Oil prices whipsawed on the news from the OPEC+ meeting but eventually changed little.
There was a renewed interest in so-called meme stocks, which seemed dead after their prices plunged and one of them, Bed Bath & Beyond Inc (BBBY), went insolvent. GameStop (GME) rallied by 13% on Tuesday and a further 20% on Wednesday with no specific news, although an earnings report is expected next week. On Thursday, it corrected by 10%. Similar to 2021, the rally was associated with massive buying of call options, but this time right-side volatility was well-contained. In the chart below, the right side (indicating deep out-of-the-money low-delta calls) of the current curve (white) increased much less than the rest of the curve compared with the curve from a week ago (red).
GameStop (GME) volatility smile
Bitcoin and Ethereum were symbolically higher this week, while altcoins were mixed. Bitcoin managed to renew its year-to-date high, albeit marginally. Solana continued its rally, adding about 7% this week. Dogecoin advanced, likely in sympathy with meme stocks.
At Deribit, crypto implied volatility (as measured by the DVOL index) declined, as the spot market almost stopped moving. Ethereum's implied volatility continued to be slightly above Bitcoin’s, although the ratio between their DVOLs remained below the historical average.
The assets under management for BITO (ProShares Bitcoin Strategy ETF) rose to their highest ever, reflecting inflows in anticipation of a spot Bitcoin ETF, according to CoinDesk data. Its volatility curve steepened dramatically, reverting back to a normal smile after being almost flat a month ago. In the chart below, the current curve (white) is far steeper than the curve from a month ago (red). The skew between low and high-delta options rallied significantly as low-delta, deep out-of-the-money options became much richer compared to at-the-money options.
BITO (ProShares Bitcoin Strategy ETF) volatility smile
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