BTC market underwent a large sentiment shift over the last 8 days. It appears that the bulls are shaken up by the first down week since early October. As of this writing, we are down $900 over 8 days and about $1700 off the all-time highs.
The change in sentiment is trifold:
- December IV is 64.5% and is now below realized 15-day, which is at 77.5%.
- Call skew is down across maturities. December put skew made a comeback and is now the highest since the last week of September. December put skew is now steeper than call skew and is above historical averages.
- Contango (basis) to December shrunk to $35–50. This is the lowest level in a while and is in mid-single digits in terms of APY.
We have had a cautious price stance lately. However, the recent uptrend is not broken. Given the recent change in sentiment, this is not a bad place to reinitiate price length and call skew length going into December expiry. A decisive violation of the support line would make us change our opinion.
Option players taking a breather on call buying have not been kind to the IV:
Thus, we no longer have a short bias in our view of IV.
Let us review last 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.
December risk reversals were huge winners this week. Traders who followed our advice made money on skew, Gamma, and short Vega. Given the lower IV and put skew appreciation, we recommend reversing the position or at least flattening it out. There is no longer a theoretical edge (on a relative basis) to owning December puts.
March risk reversals are winners on skew but losers on Vega if leaning Vega long. We still like the trade, but keep maintaining flat to long Vega bias.
Contango has come in enough (from $265 to $35-$50) to recommend exiting the basis trade and waiting for a better entry point. If you must maintain exposure to flattening of the curve, the December/January futures spread at $165 is a better option (and a capital efficient one).
This week’s recommendations:
- In December, Calls are attractive relative to Puts and we recommend getting long the call skew outright or via risk reversals with a long Vega basis; scale the levels or ratios depending on your view on IV. While inexpensive by recent standards, the decay bill going into expiry is significant.
- In March and June, put skew is attractive and calls are relatively expensive. We prefer longer Vega risk reversals (short call long put) here.
- We are turning bullish in our price view given the sentiment moderation. We emphasize the importance of stop loss orders should the uptrend break.
- Exit contango trades until a more opportune moment.
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.
