BTC had a healthy $1200 range this week. More importantly, the $12000 level has been taken out more decisively than the option market anticipated. We are currently retesting the $12000 level from above. If we hold, the June 2019 high of $14000 is an obvious next target. Realized 10-day volatility is still low at 40%. Term-implied volatility is up significantly as option traders anticipate further movement following the breakout.
Put skew is down throughout the terms. Call skew is up in the August-September period and slightly weaker in December. In March, both put skew and call skew are weaker, with call skew drop more pronounced.
Let us review last week’s recommendations:
- We like the put skew and do not like the call skew in March. We recommend being long put short call (hedged). If you are bullish, be long Vega. If neutral, flat Vega is more appropriate.
- In December, put skew is cheap and call skew is fair. We recommend being long puts vs. straddles on leveraged put spreads. Flat Vega seems to be the most prudent position.
- In August, put skew is elevated. We recommend rolling the strikes up if long or outright shorting it vs. meaty calls or straddles.
- Spot to August contango is around $140. Use it to improve portfolio returns.
March risk reversals worked if structured Vega long. That was our recommendation for a bullish development. We still like the structure but would roll the short calls higher.
December leveraged put spreads did not work unless you were long Vega. We still like to be short straddles vs. puts, as the put skew is almost flat.
August risk reversals have done the best, as the elevated put skew collapsed and calls rallied. Skew is now much closer to fair, so we recommend exiting the risk reversals and buying back the puts.
Spot to August contango is down to $47. We recommend exiting the trade on weakness or rolling the August positions into September to collect $155.
This week’s recommendations:
- We like the put skew and do not like the call skew in March. We recommend being long put short call (hedged). Flat or even slightly short Vega is more appropriate given a big IV move.
- In December, put skew is cheap and call skew is fair. We recommend being long puts vs. straddles on leveraged put spreads. Flat to slightly short Vega seems to be the most prudent position.
- Spot to August contango is around $45. Start pairing down positions on weakness or roll into a short September future.
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.