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An Ounce of Hopium for ETH Bulls

Sep 29, 2021 · 4 min read

By Ashwath Balakrishnan

Market Update

It’s a relieving sight to see green across the board for crypto today, although it isn’t a very convincing bounce for majors such as BTC and ETH. Coins like DYDX (+12.1%), AR (+11.6%), AXS (+10.5%), and BNB (+10.3%), are leading this bounce at the moment, but for most it looks more like mean reversion rather than solid demand. The market, very honestly, doesn’t look pretty. But in today’s edition of the Delphi Daily, we examine the near-term bull case for ETH, and offer the slightest bit of hopium.

September Blues
  • It’s been a terrible month for crypto from all angles. Open interest for ETH futures and options is down nearly 40% since the start of September. The market is crippled by fear, but, thankfully, there is a silver lining.
  • Options open interest fell as dramatically as it did at the end of this month due to a large number of recent expiries (September monthlies, Q3 quarterlies). Further, given the amount of open interest wiped out, this is indeed a meaningful deleveraging, giving ETH more room to push towards the upside. That is, once the fear starts to subside.

Put Buying Barrage
  • A large amount of put buying in the Oct. 8 options expiry caused the short-term put-call skew to shoot up. For those who need a refresher, the 25 delta put-call skew measures the pricing of puts and calls that have a delta of 0.25/-0.25. It helps establish relative pricing between calls and puts that offer investors similar exposure to the upside (calls) or downside (puts).
  • As a result, for one week and one month options, buying calls provide a better risk-reward than usual. And, calls are implied to be cheaper than puts.
  • At the same time, longer-term skews are continuing to fall after a short-lived increase in early September. Simply put, this means the market is facing short-term anxieties and the outlook for Q4 is still optimistic.

Buy Options, Get Paid Variance
  • Implied volatility is the future expected volatility of an asset, while realized volatility is the actual volatility an asset has seen historically. Looking at the one month figures for both data points, we see that realized volatility is higher than implied volatility.
  • This is unique because realized volatility is typically lower than implied volatility, as options sellers want to price volatility in a way that allows them to earn a spread. This spread is often referred to as the variance premium — a price option buyers pay sellers for bearing risk on their behalf.
  • With realized volatility higher than implied volatility for one month options, there is no longer a variance premium, but a variance discount. Effectively, those buying options are able to do so at a cheaper volatility than the market is actually seeing.
  • Putting two-and-two together from the last chart (calls are cheaper than puts) and this one (buying short-term options are cheap), there’s an opportunity for willing ETH bulls who believe a bounce is due in the next month or so.

Ethereum Usage Remains at Elevated Levels
  • Key on-chain data points for ETH still look fairly bullish. Transaction fees are still on the higher side, albeit fairly volatile. And daily interactions with smart contracts has stabilized at an elevated level. As we noted in yesterday’s daily, this is in stark contrast to Bitcoin, which is seeing its lowest daily fee collections in over 20 months.
  • With EIP-1559 in place, these fees are now contributing towards ETH’s value accrual and scarcity, rather than all of it going into miners’ pockets. All in all, while the market looks to be in disarray right now, there are some signs creeping up that paint a positive picture.

Notable Tweets

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