This past week has been unusually active by recent standards. We are up almost $1000 or over 10%.
We continue to believe we are in a bull market but reiterate that we need to see strength through $9200 to see if the correction is over. CME futures contango is widening again as leveraged speculators as well as players without access to physical coin pile back in.
Realized 10-day vol is sharply higher to 66.5% from 50% a week ago.
Implied vol (IV) curve underwent a “twist” as gamma months are up but Vega (deferred months) IV’s are down. Since last week, IV in January contract rallied 8.5% with March and June down -2.5% and -3.5% respectively. We believe it is due to vol and skew in deferred months getting ahead of themselves and people pairing down positions as they moved closer to At-the-Money on this rally (call skew under performing).
Let’s review our recommendations:
- Long Jan strangle vs straddle on a ratio.
- Stay long March and June put skew via leveraged put spreads. Reduce June Vega length if still long. June put spreads may be rolled into fences to take advantage of the elevated call skew.
- Bullish players should consider owning June call spreads live to take advantage of the elevated call skew.
First, we recommended selling January 8000 straddle vs buying twice the volume of 9000/6750 strangle for a credit of $430. The structure is now worth $277 vs. 8825 future for a theoretical profit of $153. The structure is now long Gamma, Vega and Delta (0.28 futures per one straddle). We recommend hedging out delta and gamma trading from now on. We do not recommend initiating the same position here as IV already slightly performed and there is no profit cushion for a new entrant to protect against time decay. January put skew has moved down substantially with 8000 put being essentially the same vol as the 9000 call. If one does not want to continue managing this position one could exit most of it by selling the 9000 calls and buying back 8000 puts on a fence (or risk reversal) around $244 value vs. 8825 (0.68 delta). This would leave a trader with a delta hedged 6750 put “just in case” we dump back.
Second, March put skew is unchanged and call skew is up. Therefore, leveraged put spreads made money if they transitioned not negative Vega by moving away from the long (lower) strikes. They lost money if are still long Vega. We recommend staying in the position and managing gamma. June call skew is flat to last week, so fences lost money as we expected. If June fences are getting too short Vega we recommend rolling puts higher to maintain Vega neutrality (or maybe even slight length). June leveraged put spreads behaved like March ones.
Third, call spreads made money on delta, lost a little on Vega. They are winning trades unless they were very high strikes.
- Continue managing the January strangle vs straddle structure. If decay is a concern get out of 9000/8000 fence or call spread at least partially.
- Stay long March and June put skew via leveraged put spreads. Stay short June call skew but increase Vega by either rolling the short call or the long put position to higher strikes.
- Bullish players should consider owning June call spreads live (unhedged) to take advantage of the elevated call skew in June and now in March as well.
- All players should consider using increased contango in the futures to enhance portfolio 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.