Last week, we saw a range of almost $1700. After an initial spike to almost 9500, BTC has been consolidating in the 8500–9200 range.
10-day realized volatility is up to 79% but has been drifting lower since the spike. IV and call skew have responded positively to the move, but are still fair (IV) to low (call skew).
Technically we are up against the support of the Summer 2019 prices that is now resistance. We need to clear $9500 and $10300 with conviction for this rally to continue. If unable, we may have to retrace to the previous support around $6800-$7000.
We view May skew and smile as priced fairly, with IV slightly low at 75.25%. September and beyond calls are still low relative to other options, even after appreciating this week.
Let us review last 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.
Calls worked across the board both on skew and IV. We do not think it is time to take profit yet. One may roll the strikes higher to reduce accumulated Vega exposure.
Risk management is never a free exercise. However, given the rise in IV, it is relatively more expensive to buy insurance this week even though the absolute prices may have fallen.
This 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).
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.