BitOoda Evening Report 4/7/2020 — Volatility

BTC is up about $800 in a reasonably steady manner. We are in the congestion zone in the low $7000’s from which we launched the last bullish run in December 2019. There are many levels we would need to clear between here and $8500 to resume the ascent.

10-day realized vol is down to 79%. Interestingly enough, implied volatility is down only in the front of the curve:

Put skew is up slightly. Call skew is unchanged in June and September contracts but is up sharply in April.

Let’s review last week’s recommendations:

  • Get long call skew by buying calls vs. straddles or puts. We like meatier calls, not the small wing as those are more discounted. Adjust the ratio to fit your IV view. We would be flat to slightly short Vol here.
  • Long June 6500 straddle vs. short September 6500 straddle, collecting roughly $928. We think longer term vol will keep coming off or gamma performs. There is more edge in the trade now, and we recommend increasing the exposure.
  • Watch contango as a sign of shorts getting overzealous. CME is still in a small contango. Deribit futures are slightly backwardated!

Call skew did not appreciate except for April. This long call skew has been a neutral trade. We would maintain a long call skew position. Given that IV is still over-realized, we would maintain a short to neutral Vega position by either adjusting weights or rolling strikes.

The June/September straddle spread did not work, as September futures swung into contango, generating extra gamma. We expected IV to come off if gamma underperformed, but that has not happened yet. We still like the trade but would not add to it. The spread is out to $1000.

Shorts were getting overzealous. Futures contango widened (CME) or developed on Deribit (from backwardation). We are back in rally mode, except the call skew is not participating.

This week’s recommendations:

  • Get long call skew by buying calls vs. straddles or puts. We like meatier calls, not the small wing as those are more discounted. Adjust the ratio to fit your IV view. We would be flat to slightly short Vol here. Avoid April call skew, we like June-September.
  • Long June 6500 straddle vs. short September 6500 straddle. Spread is out to $1000. We think longer term vol will keep coming off or gamma performs. The trade is losing money, so we do not recommend increasing size.
  • Contango is back! April/May on CME is $75, or 12% annualized. One can start thinking of picking up extra yield.

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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