The triangular consolidation pattern broke right after our last commentary.
We recommended following such an event to define both the direction of the next move and a decision to own Gamma again. Surprisingly to us, the correction was rather shallow (just under the $29K). We expected a trip to longer term support in the low $20,000’s. The market retested the short-term support line (which turned into resistance) on 1/29. The first attempt failed, and we are in limbo as of this writing. On one hand, failure to retest the slow-rising support line is bullish. However, BTC needs to take out the resistance levels around $39,500 to resume the trajectory. On the other hand, failure to resume the ascent should lead to either consolidation or a trip to the longer-term slow-ascending support line.
We lean toward an attempt at $39,500 again. January futures expiry felt like capitulation of leveraged longs, with contango flipping negative for January the day before expiry and February futures trading flat to spot. Such spread compression coincided with local bottoms in the past.
Realized 15-day volatility is healthy at 123%. Recent action has been sideways, and traders have sold options throughout the terms.
Calls have been the biggest losers, with call skew returning to historical levels! However, puts have been punished too, with 0.16 Delta puts trading close or even under ATM options. While 0.20 Delta puts are still the cheapest options on the curve, this is the cheapest (relative) level of calls we have seen since this rally started at the end of October 2020.
Let us review the recommendations from our last report:
· We prefer to lean short Gamma/Vega for the next week. We think of it as a tactical short. As soon as the market exits the triangular formation, we would want to be long Gamma. Vega will probably perform on a bullish breakout and may underwhelm in a selloff. Therefore, we will look to purchase February strangles in a week or upon breakout. If the breakout happens before January expiry, you may have to lift the hard offer. Otherwise, patience should be rewarded.
· The market is bullish until an uptrend is broken. If you want to be long, identify your trailing stop loss levels. A rise this steep is prone to sudden reversals/corrections.
· Reduce contango trades in to have room to add if spreads widen.
Short Gamma/Vega worked for patient traders. If you bought February strangles on a breakout like we recommended, you had a short window to sell out of them on a gamma pop. Otherwise, you have lost money on IV even though you scalped decent Gamma trades.
Hopefully, long traders had time to pair their positions on a breakout to the downside as we have warned.
Contango has been all over the place, both widening on a breakout and going into backwardation into January expiry. The market is in a healthy contango again. Hopefully, our readers had bullets to scale in and out of positions. There was more money to be made in market making spreads than in carry.
This week’s recommendations:
· Call skew is fair, put skew is cheap, and IV is not cheap. Therefore, either buy wings depending on your directional bias, or sell ATM options against the wings for a flatter Vega/Gamma.
· The market is bullish until an uptrend is broken. If you want to be long, identify your trailing stop loss levels. Breaking through $39,500 can put BTC into overdrive again.
· We recommend modest contango exposure, given the healthy but not overly elevated spreads.
Note to our clients — CME ETH Futures contracts will start trading on February 8th, please feel free to reach out to firstname.lastname@example.org if you have any questions.
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.