This past week had almost a $1000 price range (from the low $8200’s to almost $9200). The price action was not particularly choppy with realized 10-day vol dropping to 40%. We have so far failed to take out the $9200 level. We mentioned this level last week and in prior reports as an important technical target to break if we are to see the continuation of this rally. If we cannot take it out soon, we may head for another correction/consolidation.
Implied Volatility (IV) is down across the board, with Jan and June down -2% and March down -1%.
Last week we had the first significant strengthening of the put skew and weakening of the call skew in March and June contracts. We view put skew as still cheap. The call skew for small delta options is still very pricey. March 0.16 delta calls and below are approaching fair value vs. straddles.
Let’s review last week’s recommendations:
- Long wings vs straddle in January going into expiry. We view vol as depressed with calls fair and puts cheap. For example: Long 9750/8000 strangle 2X vs short 8750 straddle 1X for a credit of $354 (midmarket), or short 8750/8000 put spread 1x2 at $180 vs a short 0.20 futures at 8740.
- Stay long March and June put skew via leveraged put spreads. Stay short June call skew. Potentially increase Vega by buying extra puts hedged.
- Bullish players should consider owning June call spreads live (unhedged) to take advantage of the elevated call skew in June. March call skew is approaching fair except for tiny wings that we view as relatively high, so we recommend reducing March call spread position.
- Players may consider using contango in the futures to enhance portfolio returns. However, the contango is not as attractive as last week.
The January straddle vs. strangle only made $30. It is now short Gamma (vs. 9000 future). We do not like to be short Gamma into expiry at this IV. Therefore, we recommend either unwinding the trade, or purchasing extra puts to make it gamma neutral. The structure itself is short 0.37 Delta here. One could purchase the 8750 put for around $65 (0.25 delta) to increase the leverage to in this position (making it 1x4 from 1x2). Alternatively, the strangle needs to be rolled into a tighter structure. The 1x2 put spread made $130 in premium, and lost $52 on Delta hedge for a profit of $78. One can either exit the structure or try to roll the two 8000 puts into 8500 puts spending $34 of the profit (0.16 delta (0.08*2)) to make it into a tighter 8750/8500 1x2 (roughly .04 delta to the 1 and collecting $16 at marks).
March and June leveraged put spreads are slight winners due to put skew appreciation. June fences (short call long put) are much more profitable due to both higher put skew, lower call skew and lower vol on a higher price.
June call spreads are winners on both delta and call skew move. Larger delta calls are approaching fair value. The “wingier” calls (<0.10 delta) are still relatively expensive.
Contango is attractive again and at roughly $100/month in the front months. It makes more sense now to add it whenever a short position is useful or justified as a hedge.
- Given the level of January IV, we like being long wings vs straddles or “meatier” options here. Put wing is particularly attractive (puts in the 0.10-.20 delta range not <0.05 as those rallied too much on a relative basis). Small delta calls are not attractive on relative value.
- Stay long March and June put skew via leveraged put spreads. The edge in being short June skew is decreasing; the small delta calls are still pricey but 0.16 delta and below are approaching fair value. Reduce short June call skew vs puts. Do not short June calls vs straddles.
- Bullish players should consider owning June call spreads live (unhedged) to take advantage of the elevated call skew in June. However, we would take some profit by rolling both the long and the short strikes higher (reducing delta and premium).
- Traders should consider using contango in the futures to enhance portfolio returns. The contango is very attractive once again.
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. If you would like to learn more, please reach out to firstname.lastname@example.org
Today’s charts are courtesy of https://www.skew.com/dashboard/bitcoin-options