BitOoda Afternoon Report 10/20/2020 — Volatility

Welcome to one of the most boring breakouts in recent memory!

In our commentary two weeks ago, we alluded to the potential for an outsized move upon a breakout (https://medium.com/@BitOoda/bitooda-afternoon-report-10-06-2020-volatility-592135662fca). While we may still realize the $2000+ move we anticipated, the move has been very orderly, with a $1500 move so far. There has been no retracement of a breakout to provide additional gamma hedging opportunities.

Realized 10-day volatility is still 27% even after the breakout. This is especially damaging to long call players and may explain the damage that continues to plague the long end of the IV curve where a lot of call buying took place.

We expected a more violent range expansion upon breakout, and have been wrong so far. Call skew is stronger in the front contract and weaker in December 2020. March 2021 call skew is slightly stronger and put skew is slightly weaker.

Let us review last 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.

Outright December and March puts did not perform because of the vol drop. Spread to straddles did better, as Vega went negative on the move higher. At least we were not long calls. Those have been a terrible trade so far.

October strangles did not work, as the breakout has been too orderly. There are still 10 days to go, but we are getting nervous about the timing.

Contango is $50 for a 10-day duration. This is as attractive as the basis has been in a while.

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. As the IV is coming off, strangles are getting even more attractive. Monitor Vega to avoid getting too long, as it keeps underperforming.
  • In the front contracts, puts are historically fair, and calls are slightly overvalued. 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 you are 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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