Another quiet week in BTC. While the range was roughly $700 ($8700-$9400), most of the time the price sits at the same level interrupted by nearly vertical ramp ups and ramp downs. We are still below the $9500-$10000 resistance so downside trips to retest the October lows are definitely on the table.
The realized volatility is decreasing dragging the shorter dated “Gamma months” IV with it.
The implied volatility is in deep contango to reflect this fact:
In our previous commentary we have recommended getting out of short volatility structure. We were clearly wrong/early to flatten out. However, with the levels we see now and November futures expiry providing potential catalyst we would recommend getting longer gamma and vol at least on the cheaper parts of the curve.
On November 5, we recommended “buying 11500/8000 strangle vs 9500 straddle” in the November contract on a ratio that fitted a trader’s view on gamma. Put skew is up and call skew is slightly down in November, so unless aggressively long on the ratio the structure should have made you money. At this point we would like to get out of the short 9500 strike and roll this structure into a long 10000/8000 November strangle.
In December and beyond we’ve recommended to be long put skew via fences or leveraged put spreads.
In the December contract the trade made money on skew but lost on vol as the market moved closer to the Long-Put leg. We still like the trade is valid as vol does not look expensive. Our preferred puts are in the 7500–8000 range.
In March and beyond puts skew is still flat and vol is coming off. This makes put skew even more attractive. The trade has been losing money though. We recommend staying with the trade and maintaining flat or short overall position in Vega. An example would be a 9000/6500 put spread 1x2 (or higher ratio). The 1x2 is roughly $700 and hedged against $9000 future price (0.08 delta)
- Buy November 10,000/8,000 strangle ($235 value).
- Continue to be long December put skew via leveraged put spreads. Pair down fences. Position should not be Vega short here going into expiry.
- Continue to be long March put skew via leveraged put spreads.
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