Last week had a healthy $1555 range. We tried the $9200 resistance a few times but failure to penetrate resulted in further selloff. There is a cluster of December highs around $7650-$7800 area that are providing support for the moment. We have been looking for contango to collapse as a signal that over-levered longs are liquidating. Over the last couple of days, cash to March future came in virtually flat. Further out, the contango is now under 6% annualized. This to us is a signal to start establishing a long position. While a trip under $7000 is not out of the question, this is a first sign that weak longs are out.
Ideally, we would also like to see the put skew and call skew to come to normal levels. In the March contract, the put skew and call skew is now in line with what BTC contract typically exhibit (for the first time in many months). So at least in the short term the bulls and the bears are balanced. In the June and September contracts, while the put skew is up a bit, it is still significantly discounted to the call skew.
10-day realized volatility is up to 73%, the highest in a while. However, given how BTC became correlated to the rest of the market in the COVID-19 induced scare, it may not be too high. We are coming out of a particularly quiet year and BTC typically averages closer to 80%.
IV has rallied throughout the term structure and is now not cheap in the back of the curve, given this year’s history. However, given the state of financial markets in general and halving in particular, it may still prove to be attractive.
Let’s review our last week’s recommendations:
1. Stay long June and September put skew via leveraged put spreads or outright. We recommend flat to long overall Vega position. Reduce September Vega length. March puts are still attractive, but we would not ratio them anymore.
2. Given the elevated level of call skew, long June or September call spreads (unhedged) is an attractive way to get long BTC with limited downside.
3. Traders should consider using contango in the futures to enhance portfolio returns. However, start looking to unwind the trade if it drops below 5% annualized. That has been the level in previous corrections.
March puts are the biggest winners on Vol, Gamma and Skew. June and September leveraged put spreads are slight winners on getting longer Vega and very slight skew improvement. March puts are now fair relative to straddles. As a matter of fact, the whole March structure looks fair to us, other than that IV may be a bit low given what’s happening around the financial markets.
Call spreads are losers on delta, but they were meant to provide upside exposure with limited downside. We still like them here.
The contango finally came in below our target level. We recommend removing all carry trades until a better entry point presents itself.
This week recommendations:
1. Stay long June and September put skew via leveraged put spreads or outright. We recommend flat reducing September Vega accumulated on the down move.
2. March options are not too expensive given the movement. We are strike indifferent given the new skew/smile changes.
3. Given the elevated level of call skew, long June or September call spreads (unhedged) is an attractive way to get long BTC with limited downside.
4. Traders should exit contango trades as the curve is approaching fair value.
5. Fairness of contango has been a good signal to accumulate length.
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.