BTC finally experienced a significant correction.
The market is still in the overbought territory and away from the sharply rising trendlines. Price would have to break the rising trendline that is now in the 21,000–22,000 region to break the bull market. This leaves a lot of room for difference of opinions and “fear and greed” bouts which resulted in heightened volatility. Our suspicion is we are still in the bull market, but the craziness of the last 4 weeks should moderate.
The 15-day realized vol is up to 137.5% from 105% on the massive selloff over the weekend. The traders are taking a breather though and are starting to look toward normalization of movement, with March IV decreasing and January staying firm:
The largest skew change is the increase of the put skew. Traders are either locking in gains or hedging the potential for a reversal or a pull back. Overall, calls are still dear to puts from a historical perspective.
Let us review the recommendations from our last report:
· All options are historically expensive. Given that we do not know when this event will end, if you must own something shorter-dated Options make more sense. We do not think the madness persists beyond 6–8 weeks. Short at your own risk, and only if you have a game plan and an exit strategy. Being short vol may be a good trade at this level, but money management is the key.
· The market is bullish until an uptrend is broken. If you want to be long, identify your trailing stop loss levels. A rise this steep is prone to sudden reversals/corrections.
· Enter contango trades to boost returns.
We were correct to identify short-dated options as the best value. January straddle essentially paid for itself in one weekend. March did not do as well given the IV drop.
Our bullish traders hopefully had stop orders that helped them decrease their exposure in the brutal weekend correction.
Contango trades paid handsomely. Spot to January went from $600 on 1/7 and almost $900 on 1/11 to low $200’s today. We are now looking for opportunities to exit that spread or roll January future to longer dated contracts offering better rate of return.
This week’s recommendations:
· All options are historically expensive. Given that a large correction already happened, January may be at the largest risk of Vega and time decay losses. We are still far away from longer term support lines (almost $12000). Our opinion remains short at your own risk, and only if you have a game plan and an exit strategy. If you must buy options for Gamma, 0.16–0.25 Delta puts offer the best value.
· The market is bullish until an uptrend is broken. If you want to be long, identify your trailing stop loss levels. A rise this steep is prone to sudden reversals/corrections.
· Roll contango trades to the best return parts of the curve.
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.
