Welcome to a Crypto Casino.
At the time of our last writing, everyone “knew” that altcoins were going to infinity. BTC was rumored to be struggling due to the rotation into sexier “higher beta” bets either in DeFi or “joke-coins.”
Now more and more analysts are predicting the severity of the next “crypto winter.”
While we do believe that a bear market will come, we are cautiously optimistic here since the market held our support levels, albeit not without scaring everyone with violent attempts to break the $30K level.
We wrote: “Rallies to the trendline are to be sold now until the channel is regained. While we are still in a bull market, the slower moving support is much lower in the low $30K’s”. The rally to $60K failed and we crashed to current levels. As long as we trade above the slow rising trendline, we have hope that the bull market is intact. Risk management is the key should the $30K level fail decisively.
On the volatility front, the picture flipped as well. Realized 15-day vol is at panic levels of 164%!
Put skew continues to outperform, with bulls desperate to put hedges and risk management in place.
We think the skew favors puts too much in the front of the curve (it is closer to fair in September). We also think the curve is too flat and prefer front options to the deferred ones, as the vol is here and now and we are not convinced we will experience 100% + vol for three months.
Let us review our last recommendations:
- April calls are attractive on a spread to ATM or puts. Manage position sizing this close to expiry.
- September puts are attractive in a Vega neutral spread to straddles.
- Reduce June smile exposure.
April contract expired at $56127.49 vs. $55410 level at the time of our last report. Therefore, calls were huge winners vs. straddles or puts on Theta (time decay) differential.
September leveraged put structures did even better on Gamma and Vega.
With the benefit of hindsight, we exited June smile too early, but the edge in the trade was much lower.
This week’s recommendations:
- June calls are attractive vs. straddles or puts. We prefer to be Vega flat or close to it, as we do not know how long the jitters persist.
- September puts are now fair. Exit the put skew exposure if you still have it.
- We prefer Gamma vs. Vega here. June/September straddle spread, or a similar structure is warranted.
- Contango is too flat to have any meaningful exposure.
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.
