BitOoda Afternoon Report 11/17/2020 — Volatility

Another week has passed (six days to be exact) since our last report, and we are almost another $2000 higher. We are quickly breaking through upside targets. The old highs around $17100 failed to provide any resistance. The steady rising channel has been broken to the upside, and we have not retested the breakout yet. We are close enough to test the all-time high for BTC price. While it would be healthy for the rally to have a retracement, we have not had one yet. While $20K may provide resistance, there is always a chance we have a parabolic blow off rally fueled by “fear of missing out,” a.k.a. greed.

15-day realized vol is steady at 59%, but the option trades are panicking with both vol and call skew significantly higher. Last week’s IV dip on realized vol rally appeared to be a one-off.

Put skew is down across maturities and is now flat in December and negative in March. As IV starts to approach 80% (long term averages), aggressive traders might start to build a risk reversal position (short call long put hedged) to take advantage of both elevated call/put disparity and pronounced contango. This is a risky trade but has a lot of edge in it to entice experienced risk managers. It is clearly a good strategy (from the risk reward standpoint) for long players to take some of the risk off the table. There is a large disconnect between CME and retail-dominated exchanges with CME IV up to 10% higher.
Let us review last week’s recommendations:

  • In December and March, put skew is attractive and calls are relatively expensive. If one decides to be short call skew, we recommend expressing it in a Vega long fashion via long call spreads. A safer trade is a leveraged put spread.
  • In November, put skew is cheap, call skew is fair, and vol is below realized. We recommend buying strangles for a bullish vol trade. Leveraged call spreads or put spreads to get long the wings, while short ATM vol is more appropriate for vol neutral players.
  • Use contango to November to enhance returns. If contango dips towards $50, consider reducing the spread positions or roll them into a different maturity contract.

Vega long call spreads are winners in March, but not so in December. Leveraged put spreads are generally losers unless they were Vega long.
November strangles are winners, as realized Vol outperformed IV and IV is up. Ratio strategies also performed, given the skew and IV changes.
Contango dipped to $50 on Friday, expanded Monday and is now closer to $40. With $10 days to expiry we are indifferent between keeping it or rolling short November futures into December at $150.
This week’s recommendations:

  • In December and March, put skew is attractive and calls are relatively expensive. Bullish price/vol traders may consider long call spreads (underhedged) or long puts (over-hedged). Neutral or bearish (Vol) traders (as well as those who do not expect a parabolic price blowoff) may consider risk-reversals (short call long put), especially in March as March IV is 10% higher than December.
  • Use contango to enhance returns. We are not aggressive here, as contango stayed relatively stable (therefore becoming less pronounced in APR terms) with rising price.

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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