Welcome to a rocket to Mars (powered by Elon Musk)!
BTC is up almost 36% in the 7 days since our last report. The ascending resistance line was tested (as we expected) and violated on the second attempt in a violent Monday session. We are back in rally mode. The market is overbought, but not to the degree it was on the first trip to $40K. Bulls should be weary of sudden corrections. The first line of support is coming at around $43,000.
Realized 15-day volatility is back to 123% after dipping to 110% last week. IV’s are up throughout the curve with short-dated options appreciating most:
Smile continues to be pressured (both calls and puts are down relative to At-The-Money options). We view smile as underpriced and prefer to be short Straddles vs. Strangles. Puts are even cheaper than calls on a relative basis.
Let us review the recommendations from our last report:
- 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 healthy but not overly elevated spreads.
IV has performed, so call buyers made money (unless they bought teenies). Leveraged put spreads only worked if long Gamma/Vega. We continue to view Strangles as attractive but prefer to be flatter Gamma/Vega.
The long thesis proved correct and we accelerated after braking previous resistance levels.
Contango has widened on the rally, so our caution allowed us to add to the basis exposure at better levels.
This week’s recommendations:
- Smile is cheap. Put skew is the cheapest of all structure. We recommend being long wings vs. straddles. Our preferred structure is a short February 40K/35K put spread at $1015 vs 47850 (0.11 delta), or a short March 40K/35K leveraged put spread (1x1.25) at $1170 vs 48300 (0.05 delta).
- The market is bullish until an uptrend is broken. If you want to be long, identify your trailing stop loss levels. Short-term support is coming at $43K.
- We elevated increased contango exposure given elevated spreads.
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.