10/1/2019 — Tuesday Volatility Report

How the crypto world has changed in a week!

The compression wedge broke decisively within hours of our 09/24/2019 commentary. The break to the downside surprised many participants and the BTC volatility structure changed instantaneously.

Let’s first decide technical implications for the price. We are still in the bull market. We will continue to be in one until we take out this summer lows. This is of small comfort to the bulls because corrections may be deep. We believe the price scenarios for this market (assuming it is a bull market) are the following, organized from most to least likely:

  1. Corrective rally to the $9,500-$10,000 level to test the breakout followed by the sell off, to a longer-term support around $7500 or $6000.
  2. Failure to retest the breakout would mean complete disarray among the bulls and signal a quick trip to $6000 or even lower.
  3. Decisive breakout through $10,000 and a resumption of a rally to new highs.

Since our operating assumption is a bull market, we expect a rally to resume upon a completion of the corrections in the first two scenarios. We are just weary of the possible trajectories.

On to BTC Option Pricing:

Volatility and puts are back in fashion! Calls are playing secondary roles for the time being.

October, December and March implied vol is 84.5%, 88.5% and 88.25%. All three are up from 70.5%, 73.5% and 75.75% a week ago. We understand the October jump given that the 10-day realized vol is 88%. The outperformance of Vega (volatility) in the dated contracts seems to be a knee jerk reaction and is outsized in our opinion.

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The put skew is fully priced in (fair) in October and is steeper than last week but still slightly cheap in December and March. The mid-value calls (0.20-.14 delta) have been abandoned and now represent the best relative value options across all liquid maturities.
Trade recommendations:

  1. Given the move in implied vol we are no longer recommending strangles. If you want to continue betting on continuation of moves, we like Gamma over Vol (short-dated options over long-dated). Long October vs. March or December vs. March options is appropriate.
  2. If you would like to maintain long strangles, we would recommend going long March strangles but shorting the straddle to hedge out expensive vol and stay long cheaper smile. March $19,000/$6,000 strangle vs short $8,500 straddle hedged with .25 delta collects you roughly $2,890.
  3. To take advantage of both vol and skew moves, we like to be short March $8,500/$6,000 put spread vs a long December $14,000 call on a ratio to hedge out some of the short gamma.

Finally, our thoughts regarding the futures curve is that the contango has decreased to the point that it does not provide exceptional value to hedgers any longer.

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