Q3 Is Pivotal

The best setup you'll get this year is near. Here's what you need to know.

Q3 Is Pivotal

Hey guys I’m on the road this week so apologies for keeping this one briefer than usual.

Rather than our usual intro let’s dive directly into the charts today and get straight and to the point of what you need to know as we head into what will be a pivotal Q3…

And if there is hope to be found for a better performance than we witnessed in Q2 it seems to rest solely on the shoulders of ETH and its upcoming spot ETF listing, which could potentially go live as soon as July 4th.

So without further ado let’s take a look at how the market is positioning itself.

BTC Overhang

Though this week we found out we’re potentially only days away from the listing of ETH’s spot ETF, that headline was not the primary driver of this week’s price action.

Unlike in May when the sudden change of stance by the SEC sparked a rally back towards year-to-date highs, the market moving news of this week was the seemingly endless supply overhang currently facing BTC.

With the perfect storm of miner capitulation, US and German governments selling hundreds of millions worth of Bitcoin, and the upcoming unlock of previously dormant Mt. Gox supply, it’s hard to envision the market regaining the momentum it lost in June.

We can see this in the data. The BVIV 30-day implied volatility index has continued its descent back towards January levels. We can thank the overhang of spot supply shattering the market’s expectation of a rally back above $70k in the near future.

And the IV term structure chart is continually getting cheaper across the board. September is now encroaching upon sub-50 levels and even December’s expiry is falling into the 50’s.

All signs are currently pointing to a final capitulation in either price or realized volatility levels for BTC this summer. It's an event that can give way to the ideal conditions for call buying we outlined last week.

ETH however has been a much different story. 

ETH Outperformance

As we see below the EVIV index is trading over 30% higher than the BVIV index at present. There’s been a steady flow of anxious call buyers in recent weeks getting in position ahead of the upcoming ETF. It's driving up ETH’s implied volatility levels.

We can see on the following charts just how aggressive this ETH Q3 call buying has been. July 12th’s expiry for instance we saw 18,000 calls of new open interest added since June 25th.

July 26th, over 52,000 worth of open call OI since the 25th.

And September’s Q3 expiry now sitting at a whopping 212,000+ of open call open interest.

This September figure is major, and rose nearly 60% from its prior level of 133,000 open interest 2 weeks ago.

This aggressiveness brings into focus what we discussed back in May with regards to ETH’s two pathways of opportunity in Q3

Either the demand of the ETF will shatter expectations and reward these short dated call buyers, and drive another spike on the front end of ETH’s IV curve, or this lopsided positioning will be punished and the ETF launch will be another sell the news event.

The latter outcome would provide much more favorable conditions for Q4 call buyers as the market digests the new entrants, similar to the way BTC IV’s plummeted in January and early February before spiking into the end of Q1. 

We’ll have to wait and see which hand the market decides to deal in the coming weeks.

For now, ETH’s hopes of outperformance seem tightly tethered to not only higher than expected ETF inflows, but also BTC’s ability to hang on to the pivotal $60,000 region.

Should price fall back below there and retreat towards the May 1st low near $56,000, I struggle to see a scenario where ETH lives up to the hype and the short term premium the options market is currently placing on it.

These two opposing scenarios comes back to the key theme we’ve been hitting on in recent weeks - Q3 will be a test of patience. 

The ideal set-up for long call buying is forming, it just doesn’t seem to be here yet.

When in doubt, wait it out and let the market come to you.

And until we meet again….

Watching the tape,