BTC continues a pattern of short bursts of movement followed by long periods of consolidation.
While we had almost a $1000 dollar range, most of the week had limited movement, spending 5 out of 7 days in an under $500 range. Once the $10000 support level held, vol and puts sellers were back in action.
15- day realized volatility is 61%. The 10-day realized Vol is closer to 38% and it has put pressure on the whole curve.
Option flow had a strong bullish bias, with call skew up and put skew down across maturities. On a relative basis, only short-dated calls are attractive. All term calls are on a very steep call skew. Put skew in the deferred contracts is nearly flat as the market ignores downside risks other than in the short term. We wonder if such positioning can fuel a sustained rally. The positioning is crowded to the upside. IV is getting attractive in the deferred contracts. However, we still prefer puts over calls.
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). 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.
Put skew in December and March has lost. We are puzzled with the structure and still like the put skew. We cannot add to a losing position though, so holding makes more sense.
September wings have appreciated vs straddles (especially calls). With IV coming off, only a net short structure worked.
Contango is down to $30. We recommend reducing spread positions until better levels present themselves.
This week’s recommendations:
- We like the put skew and do not like the call skew in December — March. We recommend being long put, short call (hedged). Increase Vega position as IV is becoming attractive.
- In the front contracts, calls represent the best value either outright or spread to straddles as call skew is fair and IV is underperforming and not high.
- Exit spread trades on pull backs.
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.