In trading, we frequently talk about “picking up pennies in front of a steamroller.” This is especially applicable to the selling of out-of-the-money (OTM) option premiums. When price volatility remains low, such a strategy generates some yield income (pennies). When juxtaposed against the steamroller of unpredictable spikes in volatility, this then wipes out all accumulated yield income and principal.
This concept has been especially applicable to crypto markets since May, as BTC prices have basically stagnated around $30,000–$35,000. You can sense how “bored” the sentiment is by observing how the 30-day IV has steadily declined below a flatlined RV.
Another reason for this is the lack of easy CEX yields (i.e., cash and carry) from futures markets, resulting in traders seeking yields from options markets. The consistent selling of CEX premiums is reflected in the systematic decline in IVs. This has also been observed in DeFi, where Ribbon Finance, which runs simple option yield strategies, is oversubscribed.
Crypto is well-known for its volatility, so this phenomenon is abnormal to say the least. What can we expect going forward?
I. Price action is likely to get extremely volatile soon, so any on-chain shorts or borrowings need to be watched carefully. While it’s tough to say in which direction, it’s typically not a bad idea to hedge your crypto directional exposure via futures — especially since perpetual funding has been consistently negative.
Bybit’s BTC futures are currently yielding a 5% annualized premium over spot, so you’re getting paid to hedge your BTC exposure.
If you’re already denominated in stablecoin, Bybit’s DeFi Mining product is currently yielding 11%–13% — which makes it an excellent destination while you wait out the storm.
II. Risk-to-reward ratio for going long on IV is excellent now. Given the expected spikes in RV and IV, they’re still trading at a decent discount.
This means options are underpricing any future spikes in volatility, so any long vega-related strategies should do well (excluding directional bias, skew and other considerable factors).
Be cautious of the incoming steamroller, which means any option net shorting strategies need to be watched carefully.