BitOoda Afternoon Report 11/3/2020 — Volatility

BTC is roughly unchanged on the week, holding to a $1200 range. The price made a marginally higher high of $14070 on October 31, which exceeds the high of $13844 from June 2019. The next upside targets are $17K and the all-time high of $20K. We are, however, overbought and are struggling to hold the breakout.

We would not be surprised to see the market testing the lower trendline of the rising channel again.

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15-day realized volatility is up again to 52.5% from 45% a week ago. IV’s are outpacing realized, but we are starting to move, and traders are bidding up options. Both puts and calls are higher in the December-March period. However, the flow is call buyer dominated. Call skew is elevated. We are not recommending selling calls only on the overall low level of IV by longer history measures. On the relative basis, calls are dear.

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Let us review last week’s recommendations:

  • In December and March, put skew is attractive and calls are relatively expensive. We recommend being long puts either outright or spread to Straddles. Given the size of the recent move, we would not be short Vega here. If one decides to be short call skew, we recommend expressing it in a Vega long fashion via long call spreads.
  • Use contango to November to enhance returns.

Vega long levered put spreads are winners on Vega and put skew. Long call spreads are a mixed bag depending on strikes, as Vega gains are competing with call skew driven losses.

November contango is down from almost $210 at futures expiry to $110. It is still attractive, but be ready to pair it down if we get a correction.

This week’s recommendations:

  • In December and March, put skew is attractive and calls are relatively expensive. Put skew has moved closer to the historic level, so look for opportunities to exit the put skew if it appreciates further. If one decides to be short call skew, we recommend expressing it in a Vega long fashion via long call spreads.
  • 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.

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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