A very eventful week with the crypto market continuing the selloff at an accelerated pace.
We still believe that this is a bull market correction. It is necessary to clear out the overzealous longs to continue an upward path. We are starting to see a much more balanced positioning with open interest in futures dropping. The contango in the futures market is disappearing. The call skew is dropping slightly and the put skew is appreciating. There is no backwardation in the futures market so there are no aggressive leveraged shorts piling in (at least not en masse).
We believe bullish players should start accumulating positions between here and low 6000’s. If we see 4000’s we are wrong and misjudged this year rally as a beginning of a new bull run.
Realized vol is up and long gamma/vol players have been vindicated. This week saw a very healthy $1500 range with Sunday illiquid trading taking us into the low $6600’s. Realized 10-day volatility is up 20% to 68%.
Implied volatility is up across the board with November, December and March appreciating 17%, 12% and 2.5% respectively. We think it still makes sense to be long gamma though expiry but the edge is clearly smaller and December positions might need to be reduced tactically close to November options expiry.
Let’s review last week’s recommendations:
1. Long November options for expiry as a catalyst. We like most strikes other than teenie’s.
2. Flatten out December vol structure. No significant edge other than dearness of small delta calls. Possibly maintain long gamma through November expiry.
3. Continue to be long March put skew via leveraged put spreads.
Long November option positions all made money. Our original 10000/8000 strangle gained $700 vs losing $390 on a hedge (vs 7100 future) for a $300+ profit. If a trader was not asleep on Sunday and gamma hedged below $7000 the profits are obviously higher. At this point we still like November gamma going into expiry but would need to be mindful of the decay and trade smaller positions. Call skew has become reasonable. Our favorite strike is 7500 call at $46 (0.20 delta vs 7110).
Long December options paid off in both Gamma and Vega. We would recommend reducing or flattening out the December options by November expiry. Call skew is down to a very reasonable level. $9000 call (or nearby) is $107/$118 $7120 future (.16 delta) is our preferred strike range.
March leveraged put spreads made money on skew, Gamma and Vega. The skew is still historically very low. We recommend staying in the position. If the position is getting to long Vega because you move into long strikes, we recommend either rolling puts down to reduce your Vega but stay long the put skew or sell some of your lower strike puts to reduce the leverage in your ratio.
1. Staying long November options for expiry as a catalyst. We like 0.16 delta calls the most.
2. Flatten out December vol exposure by November expiry. We now favor meatier calls (0.16–0.20 delta) over other strikes.
3. Continue to be long March put skew via leveraged put spreads. Reduce March Vega exposure.