Last week we finally took out the 9200 level to the upside. However, the trading was mostly sideways with the high just under 9600. We have dropped back slightly under the 9200 level again and are about to see if that is a retest or a false breakout.
Realized 10-day volatility is still very at 47 % vs last week.
Implied Volatility (IV) is down across maturities with March and June contracts losing -2.75% and -1.75% respectively. It’s becoming a rather sleepy market. Acquiring wings as vol drops is the best risk reward strategy going forward (outright or on spread to At-the-money depending on your Vol view).
We still view the call skew fair to expensive (more expensive for small delta calls <0.10 delta) and put skew as outright cheap. Most of the puts are trading flat to slightly over ATM options.
Let’s review our last week’s recommendations:
1. Given the level of January IV, we like being long wings vs straddles or “meatier” options here. Put wing is particularly attractive (puts in the 0.10-.20 delta range not <0.05 as those rallied too much on a relative basis). Small delta calls are not attractive on relative value.
2. Stay long March and June put skew via leveraged put spreads. The edge in being short June skew is decreasing; the small delta calls are still pricey but 0.16 delta and below are approaching fair value. Reduce short June call skew vs puts. Do not short June calls vs straddles.
3. Bullish players should consider owning June call spreads live (unhedged) to take advantage of the elevated call skew in June. However, we would take some profit by rolling both the long and the short strikes higher (reducing delta and premium).
4. Traders should consider using contango in the futures to enhance portfolio returns. The contango is very attractive once again.
Jan strangles vs straddles lost money if left unhedged. With gamma hedges it was still a loser unless perfectly executed. Expiry failed to provide catalyst for a larger move.
Both March and June call skews are slightly up so the trade is a winner unless very Vega long.
June call skew is only slightly down for the “wingiest” calls and unchanged for the rest. Short fences are still winners on higher put skew and moving into a shorter Vol position on the move up.
Call spreads are slight winners on delta but losers on Vega. The exact PnL depends on strike structure. Reduce or exit the call spreads as we are concerned by our trip below $9200 level.
CME Contango is still elevated but Cash to Feb spread is now under $80 from as high as $160 around Jan expiry. Feb/March is $105 value and very attractive.
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 flat overall Vega position. If 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.
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.
Today’s charts are courtesy of https://www.skew.com/dashboard/bitcoin-options.