BitOoda Afternoon Report, 2/18/20 — Volatility

Last week had a healthy 10% range between $9,500 and $10,500. Spot BTC is currently right in the middle at $10,000. First attempt at $9500 support held and realized 10-day volatility is still low at 49% (vs. 42% last week).

Short term Implied volatility is under pressure with term IV closer to unchanged.

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March put skew is slightly up but both June and September put skew is down on a down move in price and vol. This is terrible for puts. The option market is positioned very bullishly discounting downside “tail” events at a rate inconsistent with historical performance. We are puzzled by this disregard for puts. We do agree that we are in a bull market. However, even a bull market is not immune to occasional violent retracements.

Let’s review our last week’s 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. It 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.

Put skew is up only in March but not enough to make any money since vol is down and one would roll into a higher vol higher decay position. In June and September leveraged put spreads are outright bad as vol is down. We get an F for positioning but not willing to give up on the trade yet. It is unusual to have such a low put skew in this market. Just as a reminder, the call skew almost went flat in the middle of “crypto winter” when BTC traded in the $4000’s and the forward curve was backwardated around 6% annualized.

The contango is still attractive and is wider in the back months. A short contango trader had a brief window to take profit/get long as Feb/March spread dipped below $100 Monday morning.

Our recommendation is starting to sound as a broken record as we see puts and put skew as the best risk reward on the board.

Recommendations:

  1. Stay long March, June and September put skew via leveraged put spreads. We recommend flat overall Vega position. For example, selling June 10,000/8,000 1x2 put spread you collect around $365 now on CME ($45 more than last week) and it is Delta flat, slightly Vega short (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.

Please contact sales@bitooda.io for more info.

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