BTC had a reasonable range of $950 over the last 7 days. We’ve been in a $11,000-$12,000 range for over a month with a failed breakout attempt of $12K and tested $11,000 a couple of times. It appears that many leveraged positions were liquidated into August expiry as we tested the low part of the range in both outright price and the futures calendar spreads. We are currently attempting another go at $12,000 resistance trading slightly over. We are currently cautious to buy into the breakout given how spectacularly it failed last time.
Realized vol is still low with 10-day and 15-day in the 34%-35% range. The implied volatility is slow to come off as traders are still positioning for some normalization of movement.
Given the Gamma under performance, we gravitate to flat to short Vega structures owning wings wherever skew is attractive. Call skew is up and put skew is slightly down. Call skew in deferred contracts is historically dear and put skew remains depressed. We believe on a relative basis the only reason to own calls is because IV is reasonable relative to the longer-term history.
Let us review last week’s recommendations:
- We like the put skew and do not like the call skew in March. We recommend being long put short call (hedged). Cover your Vega short and maintain a flat Vega position for now.
- In December, put skew is cheap and call skew is fair. We recommend being long puts vs. straddles on leveraged put spreads. Flat Vega seems to be the most prudent position.
- Spot to September contango is around $145. Use it to enhance your returns.
We were wrong on March risk reversals, as they continue to underperform. We still like the trade, but are reluctant to add given the beating we have taken.
December leveraged put spreads are slight losers if Vega neutral or slight winners if Vega short. We still like the put skew.
Contango is little changed to September. Deferred spreads are showing signs of bullish sentiment returning. Use them to enhance your returns if it fits your position.
This week’s recommendations:
- We like the put skew and do not like the call skew in March. We recommend being long put short call (hedged). Maintain a flat Vega position for now if price neutral or lean longer Vega if bullish.
- In December, put skew is cheap and call skew is now elevated. We recommend being long puts vs. straddles on leveraged put spreads. Given call skew appreciation, start rolling short strikes into calls. Maintain a flat Vega position for now if price neutral or lean longer Vega if bullish.
- September smile is fair, and gamma is underperforming. We recommend being long wings vs straddles being flat to slightly short gamma.
- Spot to September contango is around $140. Use it to enhance your returns.
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.