We resume our volatility report after some travel forced an interruption last week.
The technical picture remains muddled. We have exited the rising channel. The breakout line several times from below. We successfully breached that resistance on a rally to $10300’s only to fall below it again. The correction we expected has not materialized. We are waiting on a clearer signal from the price action.
15-day realized volatility is around 60%. There is pressure on IV across all maturities:
The teeny wings have moved materially higher across maturities. While the “smile” is typically stronger when IV drops, the move is the largest we have seen in a while. Meaty calls are higher and meaty puts are slightly lower. We do not view any options (puts or calls) below 0.10 delta as attractive on relative basis. Shorting them in a covered fashion may be attractive.
Let us review last 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.
Call skew is materially higher. If you were flat vol (in Sep) and short in December while holding a long call skew position, you have made money. Call skew is now fair for meaty calls and expensive for the wing. We recommend exiting the long skew positions or at least buying in a portion of a short leg to bring Vega exposure to neutral or positive.
Exiting June risk reversals worked not so much on skew (which performed to the call) as on Vega hit and decay as the market rallied towards the calls which underperformed.
June contango is still attractive and one had options to put it on at attractive levels last Monday on a rally.
This week’s recommendations:
· Exit call skew positions in the September-December periods. Look for opportunities to short wings on a covered basis (being long Gamma and Vol).
· Initiate positions in December meaty puts (7000–6500 level vs Straddles, Vega neutral or long). Meaty December puts are the most attractive out-of-the-money options on the board.
· Contango in BTC spot to June CME contract is $80. It is worth using it to enhance portfolio 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.