BTC volatility: Weekly review July 15–22, 2024

Key metrics: (July 15, 4:00 PM HKT -> July 22, 4:00 PM HKT):

BTC/USD +7.0% ($62,840 -> $67,240), ETH/USD +3.9% ($3,350 -> $3,480)
BTC/USD December (year-end) ATM volatility +15% (59.5 -> 68.5), December 25d RR volatility +40% (5.2 -> 7.3)

Major market events:

Trump survived an assassination attempt, which increased his election odds (60% -> 70%)
Trump's continued pro-crypto rhetoric boosted market bullish sentiment ("America's first crypto president")
JD Vance was chosen as Trump's running mate (pro-crypto, anti-tech giants)
ETH/USD ETF expected to launch on July 23
The 2024 Bitcoin Summit will be held in Nashville, with Trump as the keynote speaker. Market rumors suggest a possible announcement of Bitcoin strategic reserves, creating significant premium in the options market
Biden withdrew from the presidential race, endorsing Kamala Harris — despite Trump's election odds dropping from 70% to 63% (while Harris rose from 19% to 29%), BTC/USD continued to rise

ATM implied volatility:

Implied volatility rose overall as bullish sentiment returned to the market. The 2024 Bitcoin Summit led to significant premium being priced into the front-end of the BTC$ curve — the daily volatility gap also reached 7% due to Trump's keynote speech (reflected in July 27 expiry options, but currently observable in August 2 expiry options, where implied volatility rose from 50 to 67.5)
In the term structure chart, implied volatility rose almost across the board, with September 27 expiry ATM implied volatility rising from 51 to 64.5, while year-end ATM implied volatility rose from 59.5 to 68.5
Realized volatility remained subdued as prices continued to rise — observed high-frequency realized volatility stayed around 43 during this period, while daily volatility was slightly below 50
Ahead of the conference (July 23–26), weekly expiry options showed clear volatility spreads, with ETH ETF launch uncertainty priced into July 24 expiry options at about a 4% premium
Looking further ahead, risk premium is expected to persist at least until the conference, though without a local breakout, we still see slight pullbacks in implied volatility from local highs
Supply-demand dynamics last week heavily favored demand, concentrated in August-September call contracts, as the market expects a potential breakout to new all-time highs post the 2024 Bitcoin Summit

Skew/convexity:

Volatility skew rose significantly this week (skewed to the upside), reflecting renewed bullish sentiment and repricing of tail risk premiums influenced by the above narratives. This week, August 30 expiry 25d RR rose from 1.5 to 5.0, even briefly hitting a local high of 7.0!
Spot and implied volatility showed strong local positive correlation, with implied volatility rising as spot prices increased and pulling back from local highs during spot price corrections. While this partly explains the rise in 25d RR, as mentioned earlier, realized volatility did not increase significantly during spot rallies, indicating the market priced in substantial additional premium for extreme upside scenarios, especially considering BTC's potential as a strategic reserve.
Since spot prices already reflect expectations of a strategic reserve announcement at the 2024 Bitcoin Summit, the market may be disappointed if no such announcement materializes. Therefore, short-term event risk reversals should weaken as spot prices rise (which is indeed what we've observed in the past 24 hours)
Overall demand for options last week clearly favored upside structures, further exacerbating implied volatility skew

Over the past week, convexity flattened compared to risk reversal movements. 25d butterfly premiums rose alongside higher base volatility
Despite experiencing extremely high IV volatility over the past two weeks, we observed strong correlation between risk reversal levels and spot prices (i.e., risk reversals skewed more toward calls during spot rallies, while clearly favoring puts three weeks ago when prices dropped to 54k)
Overall, while we continue to observe structural supply of wings from overlay and call spread strategies, this week saw a higher proportion of outright trades (with less wing supply)

Good luck this week!