Coinvexity 4
In this issue, an options market update by SousChef and part 2 on liquidity by Mtrl_Scientist, with a particular focus on options.
Intro
@SousChef
Now that the palava over the Fed's decision has passed, markets are now shifting focus. We continue to see prices languishing in the majors with both BTC and ETH remaining in an apparent pennant pattern that has been forming since mid Jan.
1mo Realised troughed late Jan but now appears to be trending back towards late Dec levels. Implieds have caught up, flushing out the spread visible for much of Feb. (Fig 1.). While it might seem that we are witnessing the mean reverting nature of Implieds over Realised in action, contrast this with 1yr Vol (Fig 2.) Realised still trunces Implied but as before, late March appears to indicate the beginning of a reversal, with Implieds slowly creeping up in an attempt to regain prior standing.
As for outstanding expiries, March end of month is clearly the focus (Fig 3.). There's a clear imbalance between C/P for month end expiries which is understandable given that spot is sitting around 40k. With the market clearly favouring Calls, let's dig in a layer deeper to see strike distribution.
With max pain indicated around 42k and just a little over a week to go, the 50k and 45k Call holders may very well begin to roll exposure if price action remains lacklustre (Fig 4.). Another indicator that points to a reduced near-term vol environment is the Term Structure which now appears less 'spooked' than a day ago (Fig 5.).
In keeping with our mission to bring you data on everything related to digital asset derivatives, our dev team has worked tirelessly to introduce a new DEFI section. I'm sure you'll appreciate that this is still being fleshed out but we now offer insights on DOVs and Squeeth.
While this section presently offers an overview of just two vaults, a fair amount of insight can be gained from the present offering e.g. you are able to compare IV by delta, thereby visualising RR/Skew for relative Deltas, observe the risk premium on ALTs over ETH and BTC then view how this translates into reality when compared against the Alts Derivs dashboard. Furthermore with visualisations set to follow you should be able to plot and monitor how the vaults perform on an ongoing basis.
The views, thoughts and comments expressed above are solely those of the author and do not necessarily reflect those of Laevitas. For further information and discussion the author can be contacted on Telegram @foreignative.
Liquidity in High-Dimensional Datasets
After a quick word on the spot market liquidity, and given the boring PA, this part of the current Coinvexity issue will mostly revolve around trying to be creative in transforming options data. Covered topics include spot liquidity measures and their implications on PA, as well as options contract liquidity measures with granularity on the option type & side of the orderbook. Finally, heatmaps were created from orderbook update frequencies as well.
Spot
Fig. 1 shows how BTC’s bid & ask liquidity within 20% of spot-price (Binance) evolved over time. In a previous issue (marked as red line on chart) it was shown how rising ask liquidity at the expense of bid liquidity often results in a distribution top, which as we now know was the case [1]. Currently, we see both bid & ask liquidity rising, with the bid side outmatching the ask side. Over the last year, this is only the 3rd occurrence of this condition. The first time was during the formation of the last local top before retesting the 30k bottom. The 2nd time was during the run-up to a new ATH. Despite this condition currently being present, price didn’t reflect this up-trend in the way it did the last 2 times.
![](https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F1ad086ec-dd7b-47b5-aaed-02a86cfc5c27_1141x717.png)
In order to check why that may be the case, Fig. 2 should be considered. It shows the orderbook (top) & orderflow (bottom) for BTC_USDT on Binance for the past year as introduced in Coinvexity 1 [3]. Marked in the blue box, it can be seen that price is currently kept in check by liquidity on both sides. As opposed to the 30k bottom last year, liquidity is not massively skewed towards either side, suggesting more (boring) consolidation until a catalyst can clear the liquidity on either side.
Options
This brings us to the main topic of this part of the issue. In a first step, let’s explore fully reconstructed orderbooks for several contracts of the Q1 ’22 expiry in Fig. 3. Given how there are over 60 contracts, let’s only chose 4: Near-The-Money call & put (40k), In-The-Money call (30k), In-The-Money put (70k). Similar to Fig. 2, these charts show resting orders, and hence supply & demand. Given the theta decay, option prices trend towards zero, and one would not expect long-lasting orders to materially affect future price-action of these options. So, it comes as a bit of a surprise that they do. As such, the 40k-C contract shows two large ask walls that were in the books for 3-6 months and still represented the local tops in both August and November. The price data is only on closing basis, but it’s likely this liquidity was at least partially taken. The 40k-P contract shows a large ask wall that marked a local top in April before the capitulation in May. It also shows how the 2 large walls placed in July & September ’21 both marked the local bottoms in September ’21 and January ’22. The 30k-C contract was traded a lot less but shows the same supply & demand dynamic as the 40k-C contract. Finally, the 70k-P contract shows how hitting the large ask wall in early December also marked a local bottom. It appears that the interesting supply & demand dynamics w.r.t. volume happen predominantly on the ask-side, regardless of option type (DOTM-C & DITM-P contracts also show more ask-side activity, but are not included here).
![](https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F38d7372d-0b72-4c29-baca-26718bf61c5f_1310x1080.png)
Since it would be cumbersome to check each strike individually, Fig. 4 shows the combined liquidity for all 66 contracts of the Q1 ’22 expiry, but separated by side (bid & ask) and type (call or put), resulting in 4 charts (asks for call options, bids for call options, asks for put options, and bids for put options). BTC spot price is plotted on top. For convenience, the volume was converted to USDT (approximate, since only EoD resolution).
To better understand this, look at one of the charts in Fig. 3, and imagine only taking liquidity that is on the ask side and sum it up. Then, do the same for the bid-side, and repeat it across all contracts. You’ll end up with 33 bid-sums of call-type, 33 ask-sums of call type, 33 bid-sums of put-type, and 33 ask-sums of put-type. For each of these, you can create a heatmap as shown in Fig. 4.
The C-ask chart shows elevated levels of liquidity below the spot price around the time BTC bottomed in mid ’21 and for the duration of the uptrend, and again briefly after the bottom in late January ’22. The C-bid chart shows elevated levels of liquidity below the spot price around the time BTC topped in Oct - Nov ’21, and again after BTC bottomed in late January ’22. The P-ask chart shows elevated liquidity levels far above spot price that appeared near the January ’22 bottom and have been growing tremendously and dropping closer to spot price with time. Finally, the P-bid chart shows elevated levels of liquidity above spot price around the time BTC topped in Oct – Nov ’21 and again briefly recently far above spot price.
![](https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fd6f0eec3-0997-4f2a-9295-f9a9df13c143_1917x894.png)
By summing up those 4 charts, the total liquidity can be calculated as shown in Fig. 5. In absolute terms (USDT), the two features from Oct – Nov ’21 & Jan – Mar ’22 outweigh the features observed during bottom formations. It appears that these features emerges during sideways price-action but have different distances to spot price.
![](https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fa37ed878-064e-4a8b-b1f7-8cc2aba22307_1597x735.png)
Another interesting metric to look at might be the number of orderbook updates. Even though most of the volume appears on the ask side regardless of option type, it appears that most of the orderbook activity is on the bid side.
![](https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F5e569a4e-7671-4e66-8aa4-d04bf1ec2d8a_1918x793.png)
Using the same transformations shown in Fig. 5, Fig. 7 shows the total number of orderbook updates for all contracts. The two most obvious features are the periodicity of updates, and the increasing number of updates towards the expiry.
![](https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fc5ad5f56-d6f7-4005-b5f5-0f53df833cce_1065x498.png)
As Fig. 8 shows, the dips in frequency occur mostly on weekends, whereas the books are updated the most on Mondays & Fridays. Like Fig. 6, it also shows that bids are generally updated more frequently than asks.
Finally, Fig. 9 shows how the most actively traded strikes become coupled to the underlying asset’s price approximately 1.5 months before the expiry.
![](https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F54816b87-62e7-4d18-b614-53fb1f416538_1041x893.png)
Conclusion
Given how BTC price is stuck in a liquidity zone, this part of the article provided an opportunity to conduct some research on Deribit options data for the Q1 ’22 expiry and get creative with data transformations over many dimensions. It was found that long-standing ask walls are relevant for identifying local bottoms & tops on the underlying asset. Aggregate C-ask liquidity appears to become elevated at strikes below spot price for the duration of the underlying asset reverting to an uptrend. Meanwhile, elevated levels of bid-liquidity on either type appear to indicate a period of consolidation in the underlying asset. Despite ask sides displaying more resting volume, bid sides appear to be updated more frequently. Overall, the orderbooks are updated most on Mondays & Fridays on this expiry, and updated the least on weekends. Finally, which strikes are updated the most appears to be a function of the underlying asset’s price once the expiry is approximately 1.5 months away.
Sources
[1] S. Mtrl_Scientist Coinvexity, bithedge, and, “Coinvexity 2,” Coinvexity, Feb. 17, 2022. https://coinvexity.substack.com/p/coinvexity-2 (accessed Mar. 17, 2022).
[2] Mtrl_Scientist, “Material Indicators.” https://materialindicators.com/ (accessed Mar. 17, 2022).
[3] C. bithedge Mtrl_Scientist, and, “Coinvexity 1,” Coinvexity, Feb. 03, 2022. https://coinvexity.substack.com/p/coinvexity-1 (accessed Mar. 17, 2022).