BitOoda Afternoon Report 4/28/20 — Volatility

BTC is back to the level from which it experienced a sharp selloff on 03/12/2020. We are up almost $900, but the rise has been very measured.

10-day realized volatility is steady at around 70%. However, this week brought a large selloff in both term IV and term call skew. It is large enough to initiate December 2020 option contract coverage.

The IV for September and beyond is fair in the upper 70’s. That is in line with the longer-term averages. The call skew, however, is on the low side for calls other than teenies (<0.05 delta). Therefore, term calls in the 0.25–0.10 delta range represent the best risk reward trades, both outright and on levered spreads to ATM options.

Put skew is still fair. The drop in IV makes put hedges fairly priced (although not cheap) through December 2020. Long only players can either buy put protection or swap their underlying exposure for option length (calls).

Let us review last week’s recommendations:

· Bullish traders should get long call skew by buying calls vs. straddles. Given the lower level of IV and market uncertainty, we would avoid risk reversals. We like meatier calls. Adjust the ratio to fit your IV view. We would be flat to slightly long call vol here. Our preferred tenor is May and June post-halving.

· Implement a risk management program if you do not have adequate capital to self-insure against a potential market drop.

Call through September is slightly up but down in December. Our recommended call skew position has been a neutral trade unless overweight Vega. Given the fair IV level, we recommend maintaining flat-to-long exposure to Vega if the length is coming from calls.

If you were slow to initiate a hedging program but need to do so, pat yourself on the back you have better pricing available to you due to lower IV. As a reference, equity VIX is still twice the level it was before the selloff. BTC level of IV is back to pre-selloff levels.

This week’s recommendations:

· Traders should get long call skew by buying calls vs. straddles on a ratio. Given the lower level of IV and market uncertainty, we would avoid risk reversals. We like meatier calls. Adjust the ratio to fit your IV view. We would be flat to slightly long call vol here. We no longer have a preferred tenor and like all meaty calls all the way to December 2020.

· Implement a risk management program if you do not have adequate capital to self-insure against a potential market drop. We are at pre-selloff IV levels and fair put skew.

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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