BitOoda Afternoon Report 3/24/20 — Volatility

This week has been mostly about price recovery. We are up around $1300 over last week (but down $1400 over 2-weeks). We are up against resistance in the $7000 area. Taking it out would be a signal to resume the test of $8000 and $10000 levels. Failing here would mean another wave of looking for a bottom.

There are several supportive factors in place:

  • Implied volatility is elevated.
  • Futures curve is flat.
  • Put and call skew returned to what is “normal” for the BTC market.

Therefore, crowded bullish positioning is unwound and leverage is reduced. This is a much healthier market. The macro environment is still driving price action. If that stabilizes, we expect IV’s to return to the 70%-80% range.

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Realized 10-day vol is down to an impressive 156% (from 316%). Put skew is almost up to historic levels. The only reason we think it is a little lower is because the ATM volatility is so high. Calls collapsed on a relative basis. They were so elevated that they just could not go up as much as other options.
Recommendations:

  • We no longer like call spreads as a bullish bet. They performed on skew and vol. Call skew is now very fair and vol is elevated. We recommend exiting call spreads and buying futures for those seeking a leveraged long position.
  • Given fairness of skew, the only vol trade we would recommend is going long June 6500 straddle vs. short September 6500 straddle, collecting roughly $900. We think longer term vol will keep coming off. This is not a high conviction trade, so watch your size.
  • Vol is high enough to consider using options to enhance your portfolio returns (i.e., selling covered calls or covered puts to provide “yield” to your position). This is not for inexperienced traders. The financial markets are on edge. Margin requirements and liquidity conditions can turn on a dime. A player that is not nimble may end up in a total loss or a liquidation scenario following a margin call.
  • Every financial transaction involves a degree of credit risk. All hedgers and speculators involved in a derivative market should review their exposures to exchanges and counterparties and decide if the credit risk is justified. The financial conditions are as strained as they’ve been in 2008. Paper profits that are not paid due to defaults are only good as war stories and job interview 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.

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