No Win for Nvidia Vol Buyers

​​Crypto Market Week in Review (24 November 2023)

Markets

In this holiday-shortened week, both stocks and bond prices continued to grind higher, as there was no catalyst to overcome the residual impulse from last week's inflation data and the very positive seasonality. Treasury market strategists from major investment banks have become almost confident that the peak of bond yields is behind us and are now questioning just the magnitude of the yield decline (or bond price increase) next year.

The most important news of the week was Nvidia's quarterly report, with the company now being the fifth-largest in the US by market cap. The report wasn't impressive enough to support sky-high expectations, leading to a decline in the stock, but the most interesting part of the story is the relatively low magnitude of the daily move. Realized volatility was much lower than the implied volatility, as Nvidia lost 2.5% on the day, compared with the roughly 7% move implied in option prices.

Among ultrashort options, virtually all out-of-the-money options dropped, as both calls (wrong spot direction) and puts (correct spot direction) suffered from the low-magnitude move.

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Nvidia ultrashort options (1-day price change after the quarterly report)

Source: Bloomberg

The oil market has once again become preoccupied with tail risk, shifting its focus from the right (upside) to the left (downside). With no escalation of conflict in the Middle East so far, the market is now focusing on the risk of dissent within OPEC+ at the upcoming meeting next week. According to Bloomberg, "Trading in bearish Brent options surged, outpacing calls volumes by the widest margin since 2020, following OPEC+'s delay of its production policy meeting." The extreme bullish options skew, which emerged at the start of the Middle East conflict, has transformed into an extreme bearish skew, driven by concerns over OPEC+. In the chart below, this week's curve (in white) shows a heavy left-side skew, while the curve from a month ago (in red) shows a pronounced right-side skew.

WTI oil volatility smile

Source: Bloomberg

This week's crypto news was primarily focused on Binance's settlement with the US. As part of the agreement, Binance consented to pay $4.3 billion, and its founder, Changpeng “CZ” Zhao, will step down from the firm. Initially, the crypto market wobbled upon hearing this news but quickly stabilized. Given the severity of the charges against Binance, we view this settlement as a positive development for the crypto sector.

Crypto prices advanced this week, rebounding to local highs following a minor correction observed last week. From last Friday's close until this Friday morning, Bitcoin saw an approximate 2% increase, while Ethereum advanced by about 5%.

The options expiration today (November 24) is notable as it's the only one where the Bitcoin put/call ratio is relatively balanced, with all future expirations being heavily skewed toward calls. It remains to be seen whether holders of the expiring puts will roll their exposure, as has been evidently done by call holders who rolled their positions well in advance.

Bitcoin options open interest by expiration date

Source: Deribit

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