BTC continues to surprise traders with weeks of boring consolidation followed by explosive moves. The range in the low $8,000’s finally broke down, the first move to the downside of $7,400 coinciding with the October CME future expiry. The selloff proved to be a bear trap, as the other contract rallied $1,000+ points in the same trading session once October rolled off the board. The move continued in the illiquid weekend trading session, with spot BTC reaching the $10,500’s.
The technical picture is less clear to us now. On 10/01/2019 we outlined the possible technical scenarios:
“We believe the price scenarios for this market (assuming it is a bull market) are the following, organized from most to least likely:
- Corrective rally to the $9,500-$10,000 level to test the breakout followed by the sell off to a longer tern support around $7,500 or $6,000.
- Failure to retest the breakout would mean complete disarray among the bulls and signal a quick trip to $6,000 or even lower.
- Decisive break through $10,000 and a resumption of a rally to new highs.”
Since we’re currently trading below the $9,500 support level (which turned into a resistance), we are tempted to say that our Scenario 1 is still intact. However, the spike over the weekend penetrated $10,000 and makes us less comfortable with the assessment.
A nearly 40% percent weekend swing wreaked havoc in the vol market. The 10-day realized vol is now elevated at 114%.
Interestingly, the vol curve is still in contango, with gamma months having lower implied vol than the deferred contracts. This means that option traders view this giant move as a one off.
The put skew is lower throughout the term. However, November puts have experienced the highest losses on the relative basis. March put skew is now outright negative.
Call skew is fair for larger delta calls, with calls under 10% delta appearing overpriced given the move in both skew and vol.
We have the following trade recommendations:
- Traders believing that volatility is here to stay can capitalize on the contango of the vol curve. November vs March or June structures, or December vs March or June structures should perform if gamma persists.
- We believe the put skew is underpriced throughout the term. Bullish traders should be short leveraged put spreads (short the higher strike vs a higher number of the lower strike puts). We recommend vol neutral or short ratios for March and beyond and vol neutral or long ratios for November or Dec. More price neutral traders may sell calls buy puts to take advantage of the skew. These fences or risk reversals should have similar Vega exposure as the corresponding leveraged put spreads.
As always, we welcome any feedback and encourage an open dialogue. If you have questions about how BitOoda can help you execute a derivatives strategy, please reach out to email@example.com.