BTC is down roughly $1000 over the last 7 days. More importantly, we are out of the ascending channel and are now vulnerable to a downside correction. Technically, rallies to the bottom range of the channel are to be sold. Our downside targets in this correction are $8000 and then the $7000 level.
Realized 10-day volatility is down to 60%. This is one of the lower levels in the last 3 months. The long weekend in the US seemed to affect trading activity globally. Outside of a bizarre flash crash on ITBIT, gamma underperformed. The underperformance put downward pressure on IV across the maturities:
Put skew is not materially lower, but with IV coming off on the down move, puts are underperforming other options on a relative basis.
Let us review last week’s recommendations:
- Traders should reduce Volatility exposure they have accumulated in their long call skew positions in the September-December periods. Call skew is approaching fair, but IV is elevated so continue to look for opportunities to sell into strength in calls (like the vol pop yesterday).
- Stay with May and or/June risk reversals (long Call/Short put delta hedged). The put skew is still relatively high. IV is reasonable. Manage the decay on May positions as it may kill the profitability of this trade unless we move towards the top of the channel soon.
- Contango in BTC spot to May CME contract is down to $37. It is worth rolling any May shorts into June to enhance returns.
Traders who reduced their Volatility exposure on the risk reversals or levered call spreads were able to hold on to their gains. They are accumulating short exposure on this down move. So far, it is working on their favor.
The May and June risk reversals worked on gamma underperformance unless your position was very Vega long. It is now time to exit May as it is too close to expiry.
Contango opportunities were available most of the week. May to June is now $70 (from $83) and spot to May is essentially flat. One should roll all the May future shorts into June or exit the May positions and the corresponding spot exposure, thus flattening out the contango (basis) trade.
This week’s recommendations:
- Long call skew positions in the September-December periods still make sense if you have had them (not as a new holding). Call skew is approaching fair. IV is fair in September and still elevated in December. We recommend covering any short exposure you have accumulated in September. Leaning short Vega in December still makes sense.
- Exit May and reduce June risk reversals (long Call/Short put delta hedged). While the put skew is high, the implied volatility is reasonable to cheap. We are prone to a correction here and do not want to get caught too short Gamma. The trade made money on Decay and IV over the last 7 days.
- Contango in BTC spot to May CME contract is down to $5. It is worth rolling any May shorts into June to enhance returns.
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.