BitOoda Afternoon Report 8/25/2020 — Volatility

Breakout through the $12,000 level failed and turned into a bull trap. The market was unable to hold the level. While we are still in a bull trend off the March lows, BTC may need to retest the $11,000 and $10,500 levels to find its mojo again.

Price had an $900 range and realized 10-day volatility is still timid at 35%. Both the failure to breakout and the lack of movement put pressure on IV throughout the term structure.

Front call skew is down and put skew is up. The December skew is unchanged, and March meaty calls are stronger.

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). 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.

Short March risk reversals did not work, as puts are still offered. There is a little relief if the structure was short Vega as we recommended.

December leveraged put spreads only worked on short Vega. The put skew is still attractive.

Spot to August is in slight backwardation ($10). One should exit the spread or roll August into September to collect $150.
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). Cover your Vega short and maintain a flat Vega position for now.
  • 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.
  • Spot to September contango is around $145. Use it to enhance your 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.

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