SignalPlus Volatility Column (20240826): Skew
Yesterday (25 AUG) was not a calm Sunday. In the Middle East, Israel announced a 48-hour state of emergency, injecting geopolitical risks into the market, causing front-end implied volatility (IV) to rise briefly. In the realm of digital currencies, TG's founder Pavel Durov was arrested in France on charges including terrorism and fraud, leading to a drop of over 16% in TON Coin within the day, sparking global concerns about communication freedom and privacy. Additionally, the Ethereum Foundation transferred 35,000 ETH to a Kraken wallet, raising market speculation about potential price volatility, resulting in slight fluctuations in coin prices over the weekend, with an actual daily volatility of about 50%. Subsequently, the executive director clarified that this transfer was merely part of routine financial management aimed at balancing the foundation's accounts, which eased market sentiment. Under the influence of recent news, bullish sentiment in digital currencies has continued to weaken, and the prevailing risk-averse sentiment in the market has led to a decline in leverage on contracts, with perpetual contract funding rates across exchanges also decreasing, even turning negative.
Source: Deribit (as of 2 MAY 16:00 UTC+8)
Source: SignalPlus
For BTC, under the increasing weight of macro news and the lack of new narratives in the crypto community, the actual volatility has remained low at 20-25% over the past two days, with the briefly rising front-end IV quickly reverting. On the other hand, the overall implied volatility level has also significantly decreased during the day. Apart from the fact that realized volatility is low, the large amount of Top Side selling of BTC during the day, especially in the long term, has also contributed to the decline in IV. We can also see that this flow has caused a decrease in long-term volatility skew, which is now significantly below the historical 25th percentile from the perspective of the volatility cone, and the curvature of the smile curve has been flattened, resulting in a substantial drop in the FLY value.
Source: SignalPlus
Source: SignalPlus
We see similar changes in ETH. Due to the decline in actual volatility, the IV Term Structure has steepened, but since ETH did not experience the Top Side Selling Flow that occurred with BTC, the long-term IV has not decreased much. Although the convexity has decreased, it remains relatively mild compared to BTC. From the perspective of volatility skew, the medium to long-term risk-reward (RR) has also declined. Apart from considerations of correlation with BTC, the impact of buying put options from September and October cannot be ignored.
Source: SignalPlus
