This week, I had the privilege of interviewing Jeff Park from Bitwise Asset Management. He was able to explain the BTC ETFs that were launched this week.
The main things I learned during our interview are:
Volatility Smile
Puts are usually more expensive than calls when it comes to risky assets. It’s because people tend to use options for hedging their longs. This creates a skewed market demand for calls over puts. The volatility chart will typically show a half smile.
Something very unique about crypto, however, is that it has a persistent smile to its volatility surface — where calls are equally as juiced as puts, creating a “smile” In the surface of volatility:
This smile is often only seen in commodities assets when demand exceeds supply, and prices soar. The volatility smile will end when the supply reaches a new equilibrium. Bitcoin’s uniqueness is that, due to the difficulty of adjusting the supply, it is not possible for the same adjustment as you would see with traditional commodities. The smile is therefore persistent and permanent. This is very unique.
Call Heavy Flow
Out-of-the money calls have accounted for the vast majority of option activity. We can see from the chart below by Eric Balchunas at Bloomberg Intelligence that the vast majority of options activity has been on marginally OTM call or as far as strikes are currently available.
We can also see that 82% the volume of first day options on IBIT came from calls.
Deribit vs TradFi options
Jeff told me something interesting: Deribit, an exchange for crypto options that is available 24/7, should price BTC options differently than ETF. This is mainly because theta (also known as time to expiry) plays a role. Since Deribit options are constantly live for trading, the theta — and therefore the volatility — should sit at a premium to the ETF options, which only trade during standard market hours.
IBIT: The Best of the Best
BlackRock’s iShares Bitcoin Trust, or IBIT, has the majority of notional exposure despite it being yesterday’s launch date for the other ETFs:
Due to the lower liquidity, spreads are much wider on other ETFs.
The market structure changed dramatically this week due to the introduction of ETF options. While historically, the short-term market was largely determined by perpetual futures contracts, options will play an increasingly important role in price movement.
My interview with Jeff Park will give you a better understanding of the implications of this market regime change.
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