BTC is essentially unchanged over the last 8 days. Longer term charts are still the same, with the market well off the slow rising support lines. The short-term picture is more interesting:
We have a volatility-compressing triangular consolidation pattern. The apex of the triangle is close to January contract expiry. It is very possible that we experience another week of consolidation followed by a large move either to $50K or $25K. Therefore, we are inclined to be flat to short gamma here, with an eye to flip long in a week.
15-day realized volatility is drifting lower to 137% after peaking at 145%. The option traders are reacting to reduction in the trading ranges by taking a butcher knife to the IV curve:
As tempting as it is to get long IV again because it is under short-term realized, we are inclined to be patient and wait for the froth to come out further.
Largest skew changes are in the prompt contract with put skew up (and no longer cheap but fair) and call skew down (yet still historically elevated). In the terms, the small delta puts are appreciating on a relative basis as IV’s drop.
Let us review the recommendations from our last report:
- 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.
IVs proved to be expensive indeed. Kudos to our readers who had the guts and capital to short options. Puts lost less than other options as we suggested, but were still losers over the last 8 days.
Contango is down to $50 in Spot to January, and down to $400/month in the terms. We are looking to exit the front of the curve (or roll the shorts further out). In general, we are reducing the spread exposure as this market is happy to widen out the contango on every up move and we want to have ammo to enter at a better level.
This week’s recommendations:
- We prefer to lean short Gamma/Vega for the next week. We think of it as a tactical short. As soon as the market exits the triangular formation, we would want to be long Gamma. Vega will probably perform on a bullish breakout and may underwhelm in a selloff. Therefore, we will look to purchase February strangles in a week or upon breakout. If the breakout happens before January expiry, you may have to lift the hard offer. Otherwise, patience should be rewarded.
- 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.
- Reduce contango trades in to have room to add if spreads widen.
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.
