Lesson 10: What the Market is Telling You
Promise: Learn to read real market signals from the vol surface, with case studies from crypto events.
The Vol Surface as Information
Everything we've learned comes together here. The vol surface isn't just a pricing tool. It's a window into collective market psychology.
The vol surface is the market's opinion on risk, expressed in money.
When you can read it, you understand what thousands of traders collectively believe about the future.
Reading Market Fear
Signal: Put Skew Steepening
What you see: 25-delta risk reversal increasing (puts getting more expensive relative to calls)
What it means:
- Demand for downside protection increasing
- Hedgers are active
- Market getting nervous
Historical examples:
- BTC skew spiked before major exchange failures (FTX)
- ETH skew increased pre-Merge due to fork uncertainty
- Skew rises into macro events (FOMC, CPI releases)
Signal: ATM Vol Spiking
What you see: ATM IV rising across the surface
What it means:
- Overall uncertainty increasing
- Could be fear (selloff) or excitement (rally)
- Check spot direction to disambiguate
Signal: Wings Getting Bid
What you see: Butterfly (curvature) increasing
What it means:
- Tail risk demand on both sides
- Market expects possibility of extreme moves
- Often precedes volatile periods
Reading Event Expectations
Signal: Term Structure Inversion
What you see: Near-term IV >> far-term IV
What it means:
- Specific event priced in the near term
- Market expects resolution (one way or another)
- Post-event, vol will likely crush
Signal: Specific Strike Activity
What you see: Unusual volume or OI at particular strikes
What it means:
- Someone has a specific view on that level
- Could be hedging a known position
- Could be a directional bet
Case Study: ETH Merge (September 2022)
The Ethereum Merge was a known event with uncertain outcome. Here's how the vol surface evolved:
6 Weeks Before
- Term structure: Mild backwardation
- Skew: Normal put skew
- ATM vol: 80-90%
2 Weeks Before
- Term structure: Sharp inversion (weekly options 20+ vol points above monthly)
- Skew: Put skew steepened (fork risk)
- ATM vol: Spiked to 100%+
- Call skew emerged at some strikes (ETH-POW speculation)
Day After
- Term structure: Flipped to contango overnight
- Near-term vol: Crushed 30+ points
- Skew: Normalized
- Message: Event resolved, uncertainty removed
The market "knew" the Merge would reduce uncertainty. Term structure told you this weeks in advance.
Case Study: FTX Collapse (November 2022)
An unexpected event. The vol surface behaved differently:
Before (Normal)
- BTC vol: 50-60%
- Skew: Normal
- No event pricing visible
During Collapse
- ATM vol: Spiked to 100%+ in hours (parallel shift)
- Skew: Exploded (put skew went extreme)
- Term structure: Near-term shot up, but far-term also rose
- No clear "event date" = no clean inversion
Weeks After
- Vol stayed elevated for weeks
- Skew slowly normalized
- Trust had to be rebuilt
Lesson: Unexpected events create parallel shifts. Known events create inversions.
Case Study: Bitcoin Halving (April 2024)
A known, predictable event:
3 Months Before
- Term structure: Options spanning the halving date traded at premium
- Skew: Slight call skew (bullish sentiment)
- Vol: Gradually rising
1 Week Before
- Near-term vol: Elevated but not extreme
- The halving wasn't "uncertain" in outcome, just in market reaction
- Less inversion than uncertain events (Merge, FOMC)
After
- Vol: Declined gradually
- No dramatic crush (event was well-understood)
Lesson: Predictable events with known outcomes price differently than uncertain events.
Building Your Checklist
When reading the vol surface, ask:
| Question | What To Check |
|---|---|
| What's the overall fear level? | ATM vol percentile vs history |
| Is there a specific event priced? | Term structure shape (inversion?) |
| Is downside or upside feared more? | Risk reversal (skew direction) |
| Are tails being hedged? | Butterfly level |
| Is vol expected to rise or fall? | IV vs RV, term structure slope |
| Are there specific levels of interest? | Unusual OI/volume at strikes |
Practical Application
Before Trading
- Check ATM vol level (is it high or low historically?)
- Check term structure (any events priced in?)
- Check skew (what direction is feared?)
- Consider: am I paying for event premium that will evaporate?
Interpreting Changes
Common Mistakes
| Mistake | Correction |
|---|---|
| Ignoring context when reading vol | 80% IV means different things at different times |
| Assuming high vol = bearish | High vol can occur in rallies too |
| Not checking for events | Term structure inversion tells you something's priced in |
| Overcomplicating | Start with: level, skew, term structure. That's 80% of it. |
| Acting on signals too quickly | Vol surface changes can be noise. Look for persistent patterns. |
💡 Tip: Try answering each question yourself before revealing the answer.
See Also
Navigation: ← Lesson 9: Reading Your Greeks | Lesson 11: Vol Trading Intuition →