BTC is off $2000 over the last week. We are out of the recent trading range and the option traders are nervous. If you squint and look sideways, you can make yourself believe in a “Head and Shoulders” pattern with a target around $9500. This is the middle of the summer trading range, so there should be some support between $9500 and $9000.
Realized 10-day volatility is up to 80%, pulling up the front of the IV curve:
Skew changes are significant, with calls down and puts up across maturities. The skew changes are more pronounced on Deribit than on CME.
We view put skew as still attractive in December and March, but too expensive in September. Call skew is outright low in September and approaching fair in the deferred contracts.
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). Maintain a flat Vega position for now if price neutral or lean longer Vega if bullish.
- In December, put skew is cheap and call skew is now elevated. We recommend being long puts vs. straddles on leveraged put spreads. Given call skew appreciation, start rolling short strikes into calls. Maintain a flat Vega position for now if price neutral or lean longer Vega if bullish.
- September smile is fair, and gamma is underperforming. We recommend being long wings vs straddles being flat to slightly short gamma.
- Spot to September contango is around $140. Use it to enhance your returns.
March risk reversals worked on Gamma, Vega, and Skew. We recommend flattening out Vega exposure by rolling short calls lower and keeping the put skew.
December performed like March. Same follow up.
September wings performed on breakout. We recommend flattening the position out. If you must be long something in September, be long call skew leaning Vega flat via risk reversals or leveraged call spreads.
Contango is down to $32 (and was under $10 on the lows). We recommend scaling out of it on pullbacks.
This week’s recommendations:
- We like calls and do not like puts in September. Long call/short put position is recommended (Vega flat or slightly short).
- March and December puts are still attractive and call skew is fair. We recommend leveraged put spreads (long the wing). Keep Vega neutral.
- Spot to September contango is around $32. We recommend reducing spread positions.
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.