BitOoda Afternoon Report 12/1/2020 — Volatility

Attention: New All Time High reached for BTC!

While we are a few hundred dollars down WoW, it has been a wild 7 days. We have seen a $3600 range with BTC joining a great American tradition of a Black Friday sale event that lasted into early Saturday morning, giving traders a roughly 20% discount. The market recovered swiftly and reached a new all-time high today. However, as of this writing we are below that level and taking a breather.

15-day realized volatility is 84%, the highest level in many months and up from 59%. The churn is healthy as it looks like there are both buyers and sellers at these levels. The burst of movement turned the IV curve into backwardation:

Two violent selloffs brought put buyers back into the picture, and put skew is up with call skew down, especially in the December contract. Puts are still relatively cheap, but the discount has narrowed substantially since last week.

One thing we have noticed is that the 11/25–11/26 correction bottomed out before bullish optimism in both skew and contango disappeared. Therefore, we believe the sentiment is still overwhelmingly bullish and the market is prone to air-pocket like selloffs when the crowd of bulls loses conviction (or faces a margin call).

Let us review last 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.

Risk reversals worked great this week. Long put traders were able to trade from the position of strength in the selloff, plus they got the benefit of Mark-to-Market gains on skew changes. Short March traders even got an additional Vega gains from the drop in implied vol. that we did not expect in such a volatile week.

Contango to December has come in to $265 from $330 for a nice profit (or Yield) and is still attractive.

This week’s recommendations:

  • In December and March, put skew is attractive and calls are relatively expensive. With IV in backwardation we prefer longer Vega risk reversals in March and Shorter Vega in December.
  • We are neutral in our price view, however, if new highs are exceeded and the levels hold, we will be forced to become constructive on price again.
  • Use contango to enhance returns. We are aggressive here, as it stays 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.

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