BitOoda Afternoon Report 10/06/2020 — Volatility

BTC continues to consolidate in a triangle formation.

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The market spent the last week in a $500 range. Realized 10-day and 15-day volatility is down to 17% and 32% respectively. However, if the triangle pattern breaks, we will have the potential for an outsized $2000+ move in a 7- to 14-day timeframe. Given the level of October’s IV, it is not expensive to try to catch the move via long strangles, or directional options if you have a directional view. A more conservative way to play the breakout is through tight 1x2’s (being long 2 smaller delta options) on the call or put side.

IV’s have not budged, and even increased WoW as traders refuse to give up on the movement possibility.

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Skew changes are relatively small. In October, the smile is more pronounced (stronger wings). December put skew weakened. March call skew is slightly weaker and is approaching fair levels.

Let us review last week’s recommendations:

  • We like the put skew and do not like the call skew in March. IV is becoming attractive. Therefore, we recommend being long put, short call (hedged) on a ratio (being long more puts than short calls). Maintain flat to slightly long Vega.
  • In December, put skew is still attractive but calls have depreciated enough for them to be rolled down so that puts are spread to straddles, not calls.
  • In the front contracts, calls represent the best value spread to straddles or meaty puts, as call skew is cheap and IV is underperforming but not high. We recommend flat Vega waiting for a breakout.
  • Use contango to October to enhance returns.

March risk reversals worked on long Vega and decreased in the call skew. As the call skew weakens, we recommend rolling short calls down to maintain a long-put skew position but exiting the call skew short.

December put skew long has not worked. We like the position but are reluctant to add at this time.

In October, being long Calls vs. Straddles worked as the position decayed shorter Vega, thus collecting decay. We are setting up for a potential breakout, so one can either buy back the straddle or buy a strangle or additional calls to increase the leverage in the position.

October contango is around $80 (contracting $20). We recommend staying in the spread.

This week’s recommendations:

  • In December and March, put skew is still attractive but calls have depreciated enough for them to be rolled down so that puts are spread to straddles, not calls.
  • In the front contracts, calls represent the best value spread to straddles. Call skew is cheap and IV is underperforming but not high. We recommend flat Vega, waiting for a breakout. An aggressive breakout trader should buy the straddle back or buy additional strangles/calls to increase leverage.
  • Use contango to October to enhance 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

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