BTC is unchanged over the last 7 days. It did not feel calm because of the wild ride to $10050 and back to $8200. It has been excellent for Gamma traders, but it seems that the marketplace is still trying to sort out the effects of the halving. We believe that the halving is a bullish catalyst for both price and vol (especially to the call side). So far, our vol call has been better than our price view.
Technically, the selloff to $8200 tested the lower range of a rising price channel. The market held by the skin of its teeth. As long as the channel is intact, we expect to retest a February high of $10500 and hopefully take it out. Failure to do so opens the possibility of retesting the $6500-$6600 support.
10-day realized volatility is slightly up to 82%. Surprisingly, the Gamma months (front of the curve) are down, with May IV at 72.75% and below recent movement. The deferred contracts are up and appear closer to fair than cheap.
Skew changes are also uneven across maturities. In the front of the curve, call skew is down and put skew almost doubled! In September through December, call skew is up and rapidly approaching fair.
Let us review last week’s recommendations:
· Traders should get long call skew by buying calls vs. straddles on a ratio. Call skew is attractive in September contracts and beyond, but not in May. Adjust the ratio to fit your IV view. We would be flat to slightly-long call vol here.
· Contango in BTC spot to May CME contract is out to $75. It is worth utilizing the spread to enhance portfolio returns (spreads beyond May are still modest and do not appear attractive yet).
Calls are winners on vol, skew and plenty of Gamma movements in the deferred contacts. We are happy we advised to stay clear of the May call skew, hopefully saving clients some money. However, May calls are attractive now both outright (because of low IV and skew) and as risk reversals because of the elevated put skew.
CME May futures to spot BTC contango is slightly down to $67. It had widened to $120 when the market was pushing towards $10000. Hopefully, our readers were able to take advantage of the spread. It is still attractive as a yield enhancer since we are only 17 days from expiry. Spreads further out are still low historically speaking, but May/June needs to be watched for a potential rolling opportunity.
This week’s recommendations:
· Traders should stay long call skew by buying calls vs. straddles on a ratio in September through December. It is time to formulate a strategy of reducing the call skew exposure in case it keeps appreciating. A move in skew or IV higher may bring this moment about shortly. Adjust the ratio to fit your IV view. We would be flat Vega here.
· Initiate May and or/June risk reversals (long Call/Short put delta hedged). The skew is very stretched and IV is low. We believe the call leg is undervalued. Equidistant risk reversal (10500/7500 vs 8950 future) is quoted to the put. There is a lot of downside fear already priced into the short-term structure.
· Contango in BTC spot to May CME contract is down to $67. It is worth utilizing the spread to enhance portfolio returns (spreads beyond May are still modest and do not appear attractive yet).
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.