BitOoda Afternoon Report 3/31/2020 — Volatility
BTC is essentially unchanged over the last 7 days with a $1000 range.
10-day realized Vol is down to 125%. IV is under pressure throughout the term. Call skew is slightly down. Put skew is significantly higher.
Put skew is now fully priced in the June-September period and is outright expensive in the front months. Puts no longer represent positive edge. For the first time in over 9 months, we recommend exiting put skew positions. In the front contracts, puts represent an attractive short vs. straddles or calls.
Call skew is now low. Meatier 0.10–0.20 delta calls are relatively cheap (since IV is still elevated). We believe they represent the best value either as long fences or short call spreads (hedged). Call spreads should be shorted outright by traders with bearish vol view and on a ratio (buying more of a higher strike) by more neutral or bullish vol traders.
Let’s review last week’s 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 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 have been in 2008. Paper profits that are not paid due to defaults are only good as war stories and job interview questions.
1. Exiting call spreads worked well. Outright shorting them vs. buying futures would have worked even better. Vol has come in a lot and call skew is only slightly down since our last report.
2. June/September straddle spread has lost about $28 and is now $928. You could have compensated for some of the loss by trading Gamma. It is now even more attractive, and we recommend increasing the short. Vol is elevated and IV is almost the same now.
3. Selling covered puts and calls worked. Vol has come in and we are basically unchanged. There is still money in the trade, but we suggest reducing exposure on the call side especially since call skew is now cheap.
4. Hopefully our readers took this week to reposition themselves on the credit spectrum to fit their commercial objectives.
This week’s recommendations:
· Get long call skew by buying calls vs. straddles or puts. We like meatier calls, not the small wing as those are more discounted. Adjust the ratio to fit your IV view. We would be flat to slightly short Vol here.
· Long June 6500 straddle vs. short September 6500 straddle, collecting roughly $928. We think longer term vol will keep coming off or gamma performs. There is more edge in the trade now, and we recommend increasing the exposure.
· Watch contango as a sign of shorts getting overzealous. CME is still in a small contango. Deribit futures are slightly backwardated!
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.