The BTC market had a whipsaw week. After bottoming around $50K, the price is back close to all-time highs. The pace of the fast-rising trendline has been hard to maintain. However, if we are to try to follow it again, the $67K-$68K region is the next natural target. If stochastics is overbought when we get there, it could be a good entry for a tactical short. Overall, the bull trend has been consistently strong. We are beginning to wonder if the slow moving trendline is going to be revisited soon. It would be healthy for the rally to take a breather. As bullish as we are on the space, explosive rallies are usually a sign of speculation and leverage. We are concerned with the stability/sustainability of the price advance.
The breakneck pace is especially evident from a longer-term chart:
On a positive side, realized 15-day volatility has come off to 72.5% from 76.5%. Given how much contango there was in the IV curve, it is not surprising that the largest losses in IV are in deferred contracts (curve flattening):
Even though IV’s were up when we tested $50,000, put sellers are back. Call skew is up through September. Put skew is down through June.
Let us review the recommendations from our last report:
- Smile is fair in April. IV came down to levels where it makes sense to use options for directional bets or protection on linear positions.
- The only skew exposure we recommend is long puts vs ATM in September.
- Exit short April positions in basis, if you have to maintain positions in deferred futures.
If you have used April options for speculative bets, you did reasonably well. Puts paid quickly, especially if you hedged them on a 10% drop. Calls lost less than their decay shared due to Vega move and skew strengthening.
September levered put spreads did well if they were profit neutral to positive, if not Vega long.
Basis to April is back to $600 after dipping to $200 by expiry. It is now reasonable to reestablish moderate exposure. The spread in deferred contracts was less volatile.
This week’s recommendations:
- Puts are starting to look attractive again as IV’s and put skew are weakening. We prefer September as the weakest put skew, but moderate exposure is attractive in the fronts as well. We do not recommend being short the call skew since IV’s are high.
- Initiate moderate exposure to April basis.
The entirety of this report attempts to identify the best option structures available. Readers should overlay it with their directional view by under-hedging or over-hedging their preferred option structure.