BTC continues its consolidation. The prices spent last week in a $400 range. 10-day realized volatility crashed to 43.5% dragging IV down for all maturities yet again.
December IV is down 4.75% and is now over short term realized, March and June IV’s are down 2.5%.
Given the level of implied volatilities we continue to recommend buying hedged out of the money options either outright or on a ratio vs. straddles wherever skew is the cheapest. If spreading options, we would keep ratios positive (more wings) and Vega exposure flat to long. The decay has been a big knock against long positions, so ratios have performed better than outright longs. December expiry can provide a catalyst going forward, so could the launch of listed options on Bakkt. With realized vol underperforming we would be cautious on adding too much gamma until one week to December expiry and relying more on skew positions.
Let’s review last week’s recommendations:
- Long December puts either outright or on the ratio. Roll existing call positions into puts (at least partially).
- Long March and June put skew via leveraged put spreads. Get longer March vol by accumulating extra puts. Get long June negative put skew.
- HODL’s and miners should consider buying puts throughout the maturity schedule as both vol and skew is favorable.
December put skew is up and call skew is slightly down except for tiny calls. Therefore, puts are winners on a relative basis vs. other strikes. However, they are losers outright on decay vs. Gamma, and on Vega.
March put skew is stronger with call skew unchanged. June smile is more pronounced with both calls and puts slightly outperforming straddles. Therefore, leveraged put spreads are winners if not Vega long. Vega long positions are a mixed bag between skew gains and Vega losses.
Outright puts for long position holders are ok but not huge winners as delta gains are offset by Vega losses. The exact relationship depends on a strike purchased (the smaller the delta the more likely the hedge has not performed).
We view the call skew in all liquid contracts as being fully priced in with the small delta calls being overpriced on relative basis. Calls may perform given the outright reasonable level of IV, but we do not recommend a long call skew position in spreads.
The December smile is fully priced, and we do not see strikes that appear particularly attractive on relative basis.
- Long March and June put skew via leveraged put spreads. We do not recommend a short vol position but may need to be careful with being long due to a lack of a catalyst with a week left for December expiry.
- Exit December skew/smile structures due to depleting edge. Pair down gamma until a week before expiry.
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.