BitOoda Afternoon Report 3/3/2020 — Volatility

Since breaking the $9200 level BTC has spent the last week in a $500 range. We have not seen the contango come in towards the capitulation levels. Call skew is up as well. Therefore, the market is still vulnerable to further downside. We are bullish but cautious here. Ideally leveraged longs would pair down positions to allow the market to attract fresh buyers.

10-day realized volatility is down to 58% from 64%. Front month IV has taken a beating. Longer dated vol has rallied despite under performance in realized variance.

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The demand for term call skew and widening contango indicates that the specs are trying to take a stand here.

Put skew is down in March and unchanged in June and September.

Let’s review our last week’s recommendations:

  1. Stay long March, June and September put skew via leveraged put spreads or outright. We recommend flat to long overall Vega position. Given the outright level of vol, Calls in June and September look fair. Exit shorts in the call skew if you had them.
  2. 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.

Leveraged put spreads are losers in March but slight winners in June and September on increased Vega. We were fortunate to recommend exiting the shorts in the call structure but were too timid to recommend buying calls to establish length. The overall level of IV makes term options attractive. However, the call skew is now elevated, and we recommend the call owners to roll their positions down the strikes.

Contango is slightly in the front months but out by June. Still at attractive levels to enhance portfolio returns whenever a short position is justified.

  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.

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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