Bitcoin's Implied Volatility Ticks Higher; S&P 500 Sees Death Cross

The latest moves in crypto markets, in context

March 15, 2022

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Today’s newsletter was edited by Omkar Godbole and produced by Parikshit Mishra.

Market Moves

By Omkar Godbole

Bitcoin's implied volatility is creeping higher ahead of the Federal Reserve's rate decision, perhaps a sign of traders setting up options positions that would benefit from price swings in the leading cryptocurrency.

The annualized one-month implied volatility, investors' expectations for price turbulence over the next four weeks, has increased from 68% to 77% this month, according to data provided by Skew. The three- and six-month gauges have gone up from roughly 67% to 74%.

More importantly, the three-month implied volatility has popped back above the backward-looking realized volatility, having underperformed the same earlier this month.

An uptick in implied volatility indicates increased demand for options – hedging instruments. A call option gives the purchaser the right but not the obligation to buy the underlying asset at a predetermined price on or before a specific date. A put option represents the right to sell.

Seasoned traders use options to hedge bullish or bearish risks and often buy both to capture returns from any macro data release or binary-event-related volatility. Buying both call and put options represents a bullish view on volatility.

Bitcoin's implied volatility (Source: Skew)

Several orders for straddles and strangles have crossed the tape in recent days, according to over-the-counter tech platform Paradigm's Telegram-based tracker of crypto options flows. Straddle and strangle strategies involve buying both call and put options and allow investors to profit from big moves in the underlying asset.

The Fed is likely to raise rates by 25 basis points on Wednesday. And while the markets may have priced in the liftoff, potential hawkish guidance could inject volatility into the market, bringing gains to volatility buyers.

While implied volatility gauges have risen in the run-up to the Fed, overall, they are well below the highs seen in October and November.

Besides, the way options are priced suggests buying has been primarily concentrated in longer duration call options off late. Perhaps, these traders are hedging against the risk of a large move to the higher side over a three-month to one-year time horizon.

Paradigm's Telegram-based crypto options flow tracker

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Crypto Prices

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Death Cross on S&P 500

By Omkar Godbole

Daily chart of S&P 500, Wall Street's bechmark index, shows a death cross, a bearish cross of the 50- and 200-day moving averages (MAs).

The long-term bearish indicator is accompanied by a head-and-shoulders breakdown, also a bearish pattern.

Bitcoin tends to move more or less in line with the stock markets.

Bitcoin's put-call skews (Source: Skew)

S&P 500's daily chart (Source: TradingView)

ICYMI

In case you missed it, here are the most recent episodes of "First Mover" on CoinDesk TV:

Kevin O’Leary Lobbies Congress in Support of Sen. Cynthia Lummis’ Pro-Crypto Bill, Fmr Walt Disney Chairman & CEO Robert Iger Heads to the Metaverse and More

European Union parliamentarians are to vote on a proposed rule to limit proof-of-work crypto mining. O'Shares ETFs Chairman Kevin O'Leary lobbies in favor of the Responsible Financial Innovation Act by U.S. Senator Cynthia Lummis (R-Wyo.) that could alter the capital gains taxation rules for crypto. The "Shark Tank" co-host joins "First Mover" to discuss. Plus, bitcoin markets analysis from Jeff Mei of Huobi Global and insights on metaverse regulation from Bradley Tusk of Tusk Strategies.

Disclaimer: The information presented in this message is intended as a news item that provides a brief summary of various events and developments that affect, or that might in the future affect, the value of one or more of the cryptocurrencies described above. The information contained in this message, and any information liked through the items contained herein, is not intended to provide sufficient information to form the basis for an investment decision. The information presented herein is accurate only as of its date, and it was not prepared by a research analyst or other investment professional. You should seek additional information regarding the merits and risks of investing in any cryptocurrency before deciding to purchase or sell any such instruments.

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