Compression Then Volatility

From my side of the room I could hear the ball bouncing up and down as the room collectively held its breath.

While I couldn’t see the board through a haze that only a poorly ventilated room of chainsmokers could produce, I could tell what was happening.

“No more bets!” the Atlantic City casino pit boss barked.

I was in town for the local MMA show, and one misadventure after another had dropped me in the underbelly of degeneracy. 

And while it was 10 years ago, this memory is anything but hazy to me. 

As I inched closer to the roulette table my assumption was verified after a quick count - the table was loaded with high rollers. It was no wonder why things got so quiet. The professional degenerates of Atlantic City were betting big. 

I remained on the fringe of the onlookers with both fascination and detachment that only the amalgamation of the moment could provide.

And as the ball bounced about, popping in and out of color coded slots, anxious gamblers were hyper focused in ways that would put a day trader watching a Jerome Powell presser to shame. 

The stillness of the room seemed to alter physics as time slowed just as the ball settled into its mark.

“Double Zero - Green!”

The lone spot on the board where nobody had any action.

The pit boss proceeded to collect the chips without a shred of empathy.

One gambler got up and left, cursing his fate loudly as he stumbled towards the exits, while the eyes of the others met in silent communion as they waited for the next round to begin.

That’s the way she goes.

The House Wins

I couldn’t help but think back on that story as things have been playing out in all too similar a fashion in the Bitcoin options market.

Each week millions of dollars pour into directional bets, then price skips around a bit, only to end the week back near the max pain point.

Double zero.

Last week was no different, we opened Monday up above $65,000, only for price to ultimately land under $63,000 before options expired.

Directly where “the house” needed it to be. 

As you’ll see below, the max pain point on the recent expiry was $62,000 on over $1 billion of notional interest, the majority of which expired worthless. 

This is the options equivalent of the pit boss hitting double zeros in roulette, and it’s been a common theme for all expiries since we first noticed the tide shifting back in March. 

The effect this has had on options market’s implied volatility levels has been drastic with BVIV fully retracing the spike it experienced during the May 1st sell-off.

And while it experienced a quick jolt today with the move above $62,000, expect this IV plummet to continue. Especially if BTC trades in its range between the 50-day (green line) and 100-day (blue line, below) moving averages that we mentioned last week as a likely destination for price in early May. 

It’s clear support and resistance.

Compression of Time

What you may have noticed in the chart above is the range is becoming ever tighter as these moving averages near one another.

What was $66,500 resistance last week is now ~$65,400, while support has moved up from $59,500 to ~$61,960.

Compression.

The longer this choppy price action persists, the tighter this range will become, which makes a meaningful break outside of it in the not-so-distant future all the more likely.

From an options perspective, the longer price compresses in this fashion, the cheaper it will become to buy contracts in both directions. 

This is because their pricing is a reflection of where price has been in the most recent past, not necessarily where it’s likely to go in the future, which creates opportunities for those who feel they have an edge on which way the range will break as we move into the second half of 2024. 

Think of this the same way we mentioned the recent rush for puts.

The price for BTC puts a week and a half ago surged after the selloff happened. 

And there was also March, when demand for BTC calls went parabolic after we breach $60,000. Not before.

The move happens first, then the rushed demand happens second.

This allows those who are able to successfully front-run the expansion in volatility to profit when price and IV move in tandem.

One area we can look for a directional hint as to when this expansion might happen is this PANDA Terminal chart from Ben Lilly on Twitter this morning, which has been a useful leading indicator for the two most previous price expansions.

If we start to see these dots shift to predominantly red or green in the coming days, the probability of a heightened volatility move out of range will begin to ramp up.

Such a move could happen as soon as the next CPI print on May 15. If not, we might have to wait until we get closer to the end of Q2 in June, when the whopping 72,000+ BTC ($4.7 billion) worth of notional value currently attached to that expiry enters into focus.

In either event the time to be “long vol.” seems to be fast approaching once again.

Remember, boredom begets opportunity.

That’s all for me this week, I look forward to seeing you all in the Trading Pit on Tuesday where Ben and I will be unpacking these dynamics, as well as in our interactive options room in the metaverse which you’ll be hearing more about in the days to come.

Big things ahead.

Until then, watching the tape….

JJ

P.S. - If you want to be a part of our upcoming interactive options room where you can join me in an upcoming AMA, create your account on Coincall today using our referral link here.