Thursday comments from a trader
In general, we like to create trading “themes” that intersect across broad metrics — fundamental, quantitative and technical analyses.
- We see hashrate near its highs.
- the halving coming in May.
- Continuing regulatory certainty with Hong Kong’s SFC — Opening the door for institutions, however market is still dominated by Asian retail “buy side”
- We saw Coinbase Pro and Deribit have short term bearish algorithmic volatility. This week we saw similar HFT price action from CME futures which “filled the gap”.
- We believe all of these actions are coming from market makers i.e. the “sell side”
- The “annotations” from a time series analysis of signal processing from the market continues to be slightly bullish.
- Below in the daily chart you can see falling volume into a narrowing price range, which is the market beginning to coil.
So, this overall theme is Implied Vol is relatively cheap (See Tuesday’s piece) and calls around the regime of 12,500 are extremely undervalued considering the above metrics.
We express this inefficiency of the marketplace with what we believe is the best risk/reward trade. We would buy a 4 month call only partially hedged (depending on your individual bullishness of the outright). Since going back into the “regime” of 12,500 (where the pink line is) we believe the vol is roughly 73.5% (using one unit of Dec and two units of Mar to express a 4-month tenor for an average strike of 12500). We believe this is highly undervalued in volatility terms. We would expect realized vol to perform closer to 100% and over in this regime based on the above metrics and at that level of absolute price. We only partially hedge ourselves because a no hedge is not as a good risk/reward to the downside. We also don’t fully hedge the option because of the above metrics for our partial bias to the upside.
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