BitOoda Afternoon Report 3/2/2021 — Volatility

BTC is slightly up since our last report on 2/9. Note that futures are actually unchanged-to-down due to the negative creep in basis. The market has managed to complete a violent $15,000 roundtrip in the past three weeks, first making new highs in $58K’s then crashing to $43K.

The steepest rising trendline did not hold yet again, but it is hard for the market to keep such a breakneck pace for long. With slow-moving support coming in around $25K, there is a lot of room for this market to consolidate or even experience a deeper bull market correction.

Option traders are in the consolidation/correction camp as well, with IV’s dropping into the mid-90%’s even as 15-day realized volatility is still at 111% due to the violent roundtrip to the new highs.

On the skew parameters, puts are the largest relative winners throughout the curve. March call skew is also higher, but just not as much as its put counterpart.

Let us review the recommendations from our last report:

  • 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.

Smile trades worked great given the wild action over the last two weeks and the eventual drop in IV.
Our recommended Feb trade made almost $1100/BTC without rebalancing. Negative gamma trades ate into these profits depending on the traders’ style. March leveraged put spread made over $500 and was much easier to manage due to lower delta. March smile is fully priced, and we recommend exiting the smile trades or reducing substantially.

Bullish traders were able to rent at least some of the $10,000 rally with proper risk management. Our short-term support level held so far, partially aided by the news of Chinese authorities cracking down on mining in Inner Mongolia.

Contango has been on a wild ride. We are still in April futures but exited March positions as the basis to March crashed below $200 right after February expiry. ETH basis has halved in the futures and almost disappeared in spot to March as well. We are looking to our readers for potential explanations of this development.

This week’s recommendations:

  • Smile is fair in March, with vol still on the higher side. We suggest pairing down March option structures until a clearer risk reward opportunity presents itself.
  • Smile is still cheap In the June-September period (especially the put side). It has strengthened, though, from our last writing. We lean towards either reducing overall position or buying back some of the ATM options to keep Vega exposure constant (smile structures decayed and moved into shorter Vega exposures due to time and IV change).
  • Move basis trades from March into April to capture wider spreads. We are not overly aggressive here as the contango is not extreme given recent history.

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

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