BitOoda Afternoon Report 6/4/2021 — Volatility

A Cautious Case for Calls.

We have experienced sideways consolidation since our last report. Our bullish case is hanging by a thread. The slow ascending trendline has become less of a support and more of a guidance. The bulls have to continue supporting the market over $30K, as there is not much after that until the $20K highs made in early December 2020.

This change of sentiment provides a unique opportunity for bulls. The implied volatility is dropping (while still historically elevated) due to the sideways action. The call skew is almost flat. While we are not excited about outright Call prices, on a relative basis these are the best levels we have seen since the March 2020 drop to $6000. Short Call spreads (hedged) are the best risk reward trades available now. They can be either short Vega, or flat if sold on a ratio (buying more of a higher strike).

15-day realized vol has come off to 126% from 164%. The differed contracts are at a significant IV premium. We do not like the contango in the volatility curve, with the back IV well over long-term averages for BTC.

Smile has appreciated in June as the ATM IV came off. In September options, the call skew flattened out to the level where we want to own it.

Let us review our last recommendations:

· June calls are attractive vs. straddles or puts. We prefer to be Vega flat or close to it, as we do not know how long the jitters persist.

· September puts are now fair. Exit the put skew exposure if you still have it.

· We prefer Gamma vs. Vega here. June/September straddle spread, or a similar structure is warranted.

· Contango is too flat to have any meaningful exposure.

June call spreads did well, as they decayed shorter Vega in the falling IV environment. Risk reversals are trickier and depend on the strikes. However, in general they are winners as well, as you moved lower into a decaying short position in a falling IV environment.

September/ June $38K straddle spread has lost $500/BTC. It is not clear if one could have made it up on extra Gamma. We still do not like deferred options but obviously a sideways consolidation hurts front options the most.

This week’s recommendations:

· We live short Call spreads here all the way to December. They are good Delta hedged for option traders (either Vega short or Vega flat on a ratio). They are also attractive to yield seekers as income generating strategies vs. their native BTC length, especially in a current environment where the basis has collapsed and offers minimal yield.

· We prefer Gamma vs. Vega here. June/September or September/December straddle spread, or a similar structure, is warranted. Given Gamma underperformance, one may want to structure it Gamma flat or flatter (meaning being short more deferred options volumetrically).

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.