BTC was setting up for a very uneventful week, sitting in a $200 range, until it finally took a plunge yesterday.
We continue to believe that we are still in a bull market (see our 11/26 commentary for a longer discussion) — therefore $6000-$7000 is our accumulation range. We also like ETH here, as it has been sold even harder on the relative basis to BTC. If we see $4000’s again, we are wrong and have misjudged this year’s rally as a renewed bull market.
10-day realized vol is horrible at 34%. However, the recent plunge has spooked traders and implied volatility (IV) is up across all maturities. December, March and June IV’s are up 3.25%, 2.5% and 1.5% respectively.
Let’s review our recommendations:
1. 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 length until a week to December expiry due to lack of a catalyst.
2. Exit December skew/smile structures due to depleting edge. Pair down gamma until a week before expiry.
Put skew is not up on this move (even slightly weaker in March). However, the leveraged put spread made money due to length in Vega it picked up on the move down. We continue to like put skew in March and June. IV is not terribly high so owning wings is still attractive. June Call skew is up on this down move and is becoming expensive (especially with IV edging up). One should consider rolling the short higher delta put in the leveraged put spread into a call to turn a position into a Vega long fence (long put, short call). For example, if one owns a June 7500/5000 put spread 1x2, rolling the 7500 into 2 short 16000 calls makes a regular fence valued at $243 to the put (hedged with 0.34 delta vs $6830 future, or better yet hedged with spot BTC at a discount). If selling calls is too frightening in this market, one could sell 1.5 calls for every 7500 put, turning it into a (-0.75/+1.00) 16000/5000 uneven fence for $306 (0.30 delta).
We did not recommend being long December options. The straddle barely broke — even if no gamma hedging was performed. Most long traders lost money managing their positions. However, going into expiry December IV at 60.5% is not a terrible long bet. Put skew is bid on the fear of downside, but calls are reasonable with strikes around $7500 as our preferred range.
1. Stay long March and June put skew via leveraged put spreads. We are comfortable with slightly long Vega and gamma positions going into December expiry. June put spreads may be rolled into fences to take advantage of the elevated call skew.
2. Long December options going into expiry. $7500 call is offered ad $60 vs. $6705 future (0.16) delta is our preferred strike.
This report is designed 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.