BitOoda Afternoon Report, 12/3/2019 — Volatility

Following a rally into a November futures expiry, BTC has settled into a somewhat quieter regime. Bullish sentiment is coming back into the market with both call skew and contango in the futures curve becoming more pronounced.

The implied volatility (IV) was down into expiry throughout the curve. It is now fair to cheap through June contract. Given this fact, we recommend buying out of the money options either outright or on ratio vs. straddles, wherever skew is the cheapest. If spreading options, we would keep ratios positive (more wings) and Vega exposure flat to long.

Realized 10-day volatility is down slightly from 68% to 66%. However, absent an apparent catalyst, IV is down 8.25%, 3.5% and 1.25% for December, March and June contracts since last week. 1-year realized vol is currently at 72.25% and longer-term averages are closer to 80% so even longer dated options are starting to look attractive.

Let’s review last week’s recommendations:

  1. Staying long November options for expiry as a catalyst. We like 0.16 delta calls the most.
  2. Flatten out December vol exposure by November expiry. We now favor meatier calls (0.16–0.20 delta) over other strikes.
  3. Continue to be long March put skew via leveraged put spreads. Reduce March Vega exposure.

November 7500 was $46 hedged against 0.20 futures @7110. At futures settlement ($7775.69) the option made $229.69 and the hedge lost 133.14 for a profit of $96.5 or 200% of the premium. In reality, the futures had a $1000 swing in the interim and a long trader had additional opportunity to make money trading gamma.

December options were losers given the drop in IV. The drop happened before expiry so one had to be very nimble to exit just in time. Call skew did outperform, the long calls vs other strikes were a winning strategy as recommended. However, on their own, calls also lost money.

March call skew is slightly up with put skew slightly down. Hence, leveraged put spreads are not winners. However, reducing Marg vol (Vega) exposure saved one money in this volatility move.

Going forward:

December skew had a massive swing with puts dropping and calls rising relative to ATM options. We no longer view December call skew as cheap. The puts are now cheap and IV vol is reasonable vs. December future at $7370, a $6000 put at $74 or $6500 put at $147 (-0.10 and -0.20 deltas) are very reasonable. A 7500/6500 put spread 1x2 is around $255 and is slightly long Vega to the 2 (0.10 delta). A 1x2 is a pure skew play if one is not willing to get long December vol at these levels.

The market’s disdain for term puts is puzzling to us, especially as IV is becoming very reasonable.

March 7500/5000 put spread 1x2 is roughly $755 (0.20 delta vs 7500) and flattish Vega. 7500/6000 1x2 is $245 and is delta flat, Vega long.

June 7500/5000 put spread 1x2 is a credit of $735 (0.085 delta). And is almost flat Vega.

Recommendations:

  1. Long December puts either outright or on the ratio. Roll existing call positions into puts (at least partially).
  2. 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.

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