BTC is $1380 higher (at the time of writing) in a quieter week. Most of the move happened today after six days of back and forth action. We are within a trading day range of all-time highs. This fact is making traders nervous. IV is up into historically expensive territory.
IV’s are outpacing realized volatility here. Realized 15-day vol is steady at 59%. Traders must be betting on a blow off top. If you disagree, this is an excellent place to get short calls skew and Vol via Vega short risk reversals. It is not a pleasant position right now, but a lot of edge in it.
Smile is generally weaker on both sides with puts down more than calls. Contango is wide again with spot to December futures $330 and spot to Nov is $60 for a 3-day trade.
Let us review last 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.
With the benefit of hindsight, the long vol strategies worked better. Both call spreads and puts hedged/over-hedged have done well. Risk reversals did not work yet again, unless very Vega long. Given the level of IV we are more and more interested in risk reversals (long put / short call hedged) as the best risk reward trade. We are careful with sizing as there is potential for a spike through the all-time high. However, the market seems to be very bullishly positioned with IV and contango reaching elevated levels on top of call skew.
Being not aggressive on contango positioning allowed us to add to the trade as the spreads widened. Contango is as wide as we have seen recently so we are close to maximum positioning in the spreads.
This week’s recommendations:
- In December and March, put skew is attractive and calls are relatively expensive. With IV now elevated and over realized, we think scaling into short risk reversals (shorting the call) is the best risk reward strategy that combines both contango and IV edge.
- Use contango to enhance returns. We are aggressive here, as widened to 12%-15% APR.
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.