Disclaimer: I am not a financial advisor. I’m a blueberry. I possess no formal financial education, no advanced degrees, and possibly no brain cells. I am merely a moron with a Substack. Absolutely nothing in this article is truthful, factual, or even remotely accurate—it is pure, unfiltered parody. While I will reference various complex concepts, I will simplify them to a level that makes sense to me, which means they will become entirely nonsensical and wrong. Please do not take anything in this article seriously or as advice. I am making all of this up. None of it is true. Not a single word.

Making real money from fake, imaginary internet money is pretty cool. Below is a screenshot of Deribit’s BNB/USDC Perpetual along with market neutral order book ATM IV from a roughly two hour period in October of 2024.

Notice how the ATM IV moves in distinct, discrete cycles. This isn’t due to poor spline fits but rather a result of systemic market maker mispricing on Deribit over several months last year; I was the one messing with [hAkuna matata] and [Firm B], exploiting highly predictable quoting logic and causing vols to cycle in this manner.

In order for me to explain the cause of this, I need to explain a few key concepts— concepts that are not crypto native by any means.

Skew Stickiness Ratio, SSR, aka Super Skew Ratio

The Skew Stickiness Ratio (SSR) is a metric used in options trading to describe the behavior of implied volatility skew in response to movements in the underlying asset's price. Specifically, it quantifies the degree to which the volatility skew remains "sticky" to the original strike prices versus adjusting dynamically with the underlying asset.

A ‘normal’ SSR is usually 1.3, tending to be slightly lower in calm or rising markets and slightly higher in more volatile conditions. On days with significant price movements, especially for shorter maturities, it often approaches 2.0. Theoretically, there are reasons to expect the SSR to fall within the range of [1, 2]. (A notable prolonged exception to this is observed in KOSPI options, where the SSR frequently exceeds 2.)

For some more in depth detail of this, Dr. Timothy Klassen’s Vola Dynamics has a very good post on SSR in the case of SPX options1.

Post Only Orders

A post-only order is a type of limit order in financial trading that is explicitly designed to add liquidity to the market by ensuring that the order is posted to the order book without being executed immediately against an existing order. If the post-only order would execute upon placement (i.e., it would "take" liquidity), it is either rejected or adjusted (depending on the exchange's rules) to avoid immediate execution. In the case of Deribit, the order is adjusted to one tick away from an execution.

Example: The current market is 12@15 and a market maker tries to quote 17@20, the market maker’s 17 bid will be lowered to 14 (assuming 1 dollar ticks) and hence the market’s new top of the book becomes 14@15.

Contradictory Theos

Crypto options trade 24/7. Traders don’t work 24/7. There’s a high level of automation that goes into the market makers’ algorithms to price these derivatives. At a high level, every market maker has very similar systems. Crypto is a known volatile product, and on large moves, what’s maybe a small difference in SSR starts to become quite large. These are the times in which the different MMs would start to develop different theos.

Crypto options are also relatively small volume wise— especially alt coin option volume so the only real incentive for market makers to even bother wasting their time quoting them is because of Deribit’s market maker program. Deribit pays out money to the top 3 market makers by resting order market share (as well as meeting uptime and other requirements). This is what the market makers are really after. For this reason, all of the market makers weren’t really paying too much attention to their quoting and would end up at points where their theos were crossing by several vol points.

Now, I think the obvious question would be— “How did you know their theos were crossing?”. Crypto option order books are relatively thin and since there are only a few market makers you can easily identify different participants based on the size that they would show. For example, there was a MM quoting 15 up across the whole chain and another MM quoting 75 up. I modeled out the different MMs normal quoting widths and then on occasions when the top of the book was min tick wide, I’d check to see if I thought post-only was taking place.

To simplify this down, let me give an example. Suppose that I expected the 15 lot MM to quote 4 ticks wide and the 75 lot market maker to quote 7 ticks wide and the order book was:

• 13.2 bid for 15; 12.6 bid for 75

• 75 offered at 13.3; 15 offered at 15.4

This implies that the 15-lot MM's bid at 13.2 is lower than it would typically be due to their post-only quoting. I can then lift the 75 lot MM and scalp out right away when the 15 lot MM raises their bids to what they would be if post-only was not taking place. Now, it goes without saying that at least one of them had to have had their SSR incorrect, but did I really care which one was the more +EV leg when I could keep rinsing and repeating this for hours every time it occurred? Nope.

I was over 90% of daily BNB options volume during this time period. It took [hAkuna matata] and [Firm B] a full 2 months to realize they were being arb’d. At the end of November, both firms fixed their quoting practices, and no market makers qualified for Deribit’s alt coin program that month due to the overhaul. While it’s not the perfect metric to quantify how well this did, I was running a market-taking strategy with a Sharpe above [**a stupidly high number that is misleading as to how well this performed**]! (It’s worth reiterating, how small the volume is in alt coin options though— like I said before, the only reason someone would MM this is for the rebate program.)

This obviously doesn’t happen on Deribit anymore, otherwise I wouldn’t be posting it, but it was pretty fun to arb the MMs while it lasted; the only other market where one could get 3-5 vol point arbs would be India….