BitOoda Afternoon Report 1/7/2020 — Volatility

Happy New Year to BitOoda vol report readers!

December has been a rather quiet month with only one big move on 12/18, right after our 12/17 commentary. The December contract expiry was the quietest we’ve seen in a while, providing only limited opportunity for long option traders to make money. As of today, the 10-day realized vol stands at 50% and 30-day at 51.5%. Short gamma trades in general paid off unless very poorly timed. Longs had to fight for every penny, even though implied vol has not been historically expensive.

We finally took out the $7500 level, and price and contango in the futures indicate a return in short-term bullish enthusiasm. We need to see strength through $9200 to conclude that the correction is over.

Since our last writing, front month IV is down but June IV is up 4%. Either the recent up move brought option buyers back, or people began to position themselves for halving uncertainty.
Let’s review our past recommendations:

  1. Stay long March and June put skew via leveraged put spreads. We are comfortable with slightly long Vega and gamma positions going into December expiry. June put spreads may be rolled into fences to take advantage of the elevated call skew.
  2. Long December options going into expiry. $7500 call is offered at $60 vs. $6705 future (0.16) delta is our preferred strike.

March call skew is down and put skew is flat. IV is up 1%. This is a neutral trade and it is shorter vol and gamma on the way up, so at least one avoided the extra decay moving away from the long strikes. Unlikely to have had resulted in large PnL. June call skew is down but IV is up, so both fences and leveraged put spreads are a mixed bag and depend on how long Vega the positions were. Fences made money on skew, but lost money on Vega if the position turned Vega short. If started as a Vega long position, the move has not been large enough to turn it Vega short yet, so the fences should be net profitable on both skew and Vega.

We continue to see both March and June put skew as historically cheap. March call skew is approaching fair with June still expensive.

Jan IV is fair given realized vol, but lower from a longer-term average perspective. The smile is fair. We would look to get into a leveraged wing position. VS. 7970 Jan future a long 9000/6750 strangle +2X VS. short 8000 straddle -1X is roughly $430 credit and only slightly long Vega and Gamma.

Recommendations:

  1. Long Jan strangle vs straddle on a ratio.
  2. 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.
  3. Bullish players should consider owning June call spreads live to take advantage of the elevated call skew.

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.

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