BitOoda Afternoon Report, 2/11/20 — Volatility

The retest of the $9200 zone held and we are now up to $10300. The $9500–10200 was a support zone 07/2019–09/2019. This is now a resistance. We should see if it holds.

The move has been rather orderly, and realized 10-day volatility is still low at 42%. Implied volatility is up in the short-dated options, slightly down in the longer-dated options. This nonperformance of IV on the way up is bad for hedged call positions. The market, however, does not agree and is very bullishly positioned. IV call skew is up and put skew is down. Contango is wider across the curve with Feb20/Mar20 out to $175. Unless this market explodes up, the call skew may come under pressure. The one-week IV changes for March, June and September are +2%, +0.5%, -0.75% respectively.

Let’s review last week’s recommendations:

1. Stay long March, June and September put skew via leveraged put spreads. Increase the leverage as IV vol comes in by buying more of smaller puts or by rolling them up. We recommend a flat overall Vega position. If you want to collect decay, be short straddle vs strangle as realized Vol is terrible but implied’s are not expensive historically.

2. Traders should consider using contango in the futures to enhance portfolio returns. The contango is still very attractive.

Leveraged put spreads are mixed. Overall move was large and “meaty” puts suffered more that the small ones as they became smaller in Vega. For example, March $9000/7750 1x2 gained $85 in premium and lost $32 on delta for a gain of $53. The gain could have been a loss had the skew change occurred without the move up. Strangles vs straddles did not work. We had a large move that was very orderly, so even with proper gamma hedges straddles outperformed. IV is underperforming but is historically fair to low. We think staying long the put skew via long puts or leveraged put spreads still makes sense.

Contango is still there to take advantage of. It has not dropped during a week for traders to rebalance and buy back the short futures.

Recommendations:

1. Stay long March, June and September put skew via leveraged put spreads. Roll both the shorts and longs higher. We recommend flat overall Vega position. For example, selling June 10,000/8,000 1x2 put spread is Delta flat, slightly Vega long (and slightly negative put skew).

2. Traders should consider using contango in the futures to enhance portfolio returns. The contango is still very attractive.

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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