BitOoda Afternoon Report 10/13/2020 — Volatility

We broke out of the triangular formation which we discussed on 10/06. The breakout resulted in a $1000 point rally. Technically the $10,900-$11,000 region should be a buy zone (with stops). Realized 10-day and 15- day volatilities are up to 27% and 35% respectively.

The option market is utterly unimpressed by the move. IV’s are down across maturities.

Moreover, Call skew and smile is down in both October and December. Put skew is down in March. It is highly unusual for wings to drop more than ATM options on a vol drop after a breakout. Either call overwrite programs are overwhelming this market or people are getting too comfortable selling premium. It is unusual but we do not see any relatively expensive options other than the teeny calls in December-March or teeny puts in October. However, even those are hardly a sale given the depressed levels of ATM vol. We recommend being long Strangles either outright or against Straddles across maturities. Cheapest wings are October calls and December through March puts (March put skew is negative).

Let us review last 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.

Put skew is down. We have been wrong on the trade. The only good thing is that if spread to straddles the Vega and Skew exposure dropped on the move up. We do not understand the market pricing for the downside. We cannot add to the losing trade but still view long puts as a great risk reward strategy, especially for players that are structurally long BTC.

October skew has underperformed on both Vega and Call skew. We think the market treatment of a breakout is too dismissive and view the probability for a $2000+ move off the $10500 level as elevated.

Contango is down to $55 but is reasonable for 23 days to expiry.

This week’s recommendations:

  • In December and March, put skew is attractive and calls are fair. We recommend being long Strangles or Puts either outright or spread to Straddles.
  • In the front contracts, smile is historically fair. Given the level of IV, both wings are attractive. We recommend being long wings on either side (or both), either outright or spread to straddles if uncomfortable with decay.
  • 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 structure.

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