Notes From The Trading Desk #7

Pionex Trading Desk 4/24/2023


After the ETH Shanghai upgrade, the options market on ETH has completely reversed itself. There is now a great demand for downside protection, as exemplified in the negative skew for both 25 and 5 delta options. 

We now see some pockets of the crypto community calling for alt season, and with the explosion of meme coins such as $CHAD and $PEPE, there seems to be too much froth in the market. We don’t see widespread retail investors returning to the market, so without the new inflow of funds, we don’t believe the explosive rallies will continue. From the more professional investor side, we saw an outflow of $30 Million in the past week as Bitcoin hit major $30k resistance. However, Ethereum had $17 Million in inflows as Shapella brought in investors. 

This week, we will focus on the earnings reporting from big tech companies. Below is the schedule of these reports and other major economic data.


Wednesday: META, BA, Durable Good Orders

Thursday: AMZN, SNAP, PINS, Jobless Claims

Friday: PCE Inflation Data

In our last note, we said we would be selling volatility on rallies for both BTC and ETH. This has played out perfectly as the ETH upgrade spiked volatility on both puts and calls. Now there is actual high volatility in BTC and ETH prices, so we want to see IV catch up on the options. We will still stick to the same plan selling options when IV spikes, but only if they are at levels comparably higher to the Historical Volatility (realized). As seen below, the Historical Volatility is trending up, and the ATM IV is coming down. We will not be looking to trade if this trend continues. 

Technical Analysis

We ran up to $30,000, which is 1 of the most important levels in 2021, as it marked the higher low. If we are looking at the chart as a big range, $30,000 is the key mid point level separating the lower and upper sections of the range. From the bottom in 2022 we have ran up 100% which is a large gain and we could easily see a 50% retracement before moving higher.

Looking closer at the daily chart we see decreasing volume on this breakout representing a lack of demand which supports that this was a false break. This was confirmed by last week’s action. Currently prices are right above the 50-SMA which could act as a level of support if buyers are strong. If we break under $27,000 the next level of support we have is $25,000 which was the previous higher-high. I am expecting a false breakdown under $25,000 and reclaim marking the low point for this pull-back. If Bitcoin can surprise me and reclaim $30,000 then that means the pullback is over and we are back on the road to $36,000.

Option Analysis

BTC Option Skew 7d 25 delta has a -3% skew to the downside showing a higher interest in puts. The skew gets larger as we go more OTM -6% IV for 5 delta options. As we go further out in time, the skew flattens out for both 25 and 5 delta options hovering near equilibrium. ETH 7d 25 delta options have a -6% skew to the downside and a -17% skew for the 5 delta options. This represents that traders are hedging the extreme downside risk for ETH, which also represents opportunities for put sellers to capture this high IV. 

BTC Max pain for the next 3 days is $27k. We currently have no directional view but believe that $27k is an important level if BTC buyers want to show strength.

Friday 4/28 expiry BTC options have a 3 Billion Notional value and a P:C ratio of 0.83. Large quantities of $32k and $34k calls compared to the opposite side put.

Trade Placement

We are focused on selling volatility when it comes back into the market. Right now, close-to-ATM options are not attractive, and so we are selling far OTM 5 delta options, especially the puts where IV is skewed towards. ETH $1,600, expiring 4/28, and BTC $25,000, expiring 4/28 Buy-The-Dip, are extremely safe trades and what we are investing in. For covered gain, we are looking at BTC $30,000 (56% IV) expiring on 4/28 and ETH $2,050 (70% IV) expiring on 4/28.

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