One thing we learned this year is that BTC does not take a break for the holidays! Prices have doubled in the 23 days since our last report.
The rising wedge that allowed us to call for imminent new all-time highs has been broken to the upside and the trend has gone hyper-exponential. Such a rapid ascend is intrinsically unstable. We do not know however, the point from which it retraces its progress.
The 15-day realized vol is up from 59% to 105%. The traders are projecting the chaos to continue with IVs outpacing the progress of realized movement:
Call skew is slightly down and put skew is slightly up, but not enough given the massive move in IVs. We expected the call skew to come off more given the IV change and the dearness of the starting point.
Let us review the recommendations from our last report:
· In December, puts are now fair and calls are becoming relatively expensive. IV is not particularly high, so we do not recommend shorting calls. We do prefer to roll the long strikes down into meatier calls or even puts.
· In March and June, put skew is attractive and calls are relatively expensive. We prefer flat to Vega risk reversals (short call long put) here (i.e., maintain the position but do not add to Vega exposure and let the rally “sell” your longer Vega on the way up).
· We maintain a bullish bias in our price view for as long as the trend holds. We emphasize the importance of stop loss orders should the uptrend break.
· Enter contango trades to boost returns.
December Gamma performed into expiry. Our recommendation to roll the strikes down provided both extra gamma and ease of managing the expiry. We liked rolling 22K December calls into 20K December calls.
March-June risk reversals were a disaster unless accomplished by a bullish Vega and Delta bias. The trade made money on skew but the Vega impact is negative. Even a March 35,000/20,000 RR crossed at 20,100 (along Vega and Gamma trade at inception) is barely a scratch with all the gamma hedging (it is down $3000/CME lot without additional swap purchases). IV is very elevated here and is well above historical averages. Maintaining the short Vol/Gamma position is for traders with deep pockets and reduced need for sleep. It may be the right trade, but it is hard to know when the madness ends.
The bullish bias was warranted. We must admit that once the upper part of the trendline was breached at $24,000, we were shaken up in our conviction to stay long. Hopefully our readers had better nerves and stayed long.
Contango has been attractive not only in the front spreads but all the way to the March contract. It also came in to $200 in the front on New Year’s Eve, allowing nimble traders to take profit and later reestablish it between $400 and $500.
This week’s recommendations:
· All options are historically expensive. Given that we do not know when this event will end, if you must own something shorter, dated Options make more sense. We do not think the madness persists beyond 6–8 weeks. Short at your own risk, and only if you have a game plan and an exit strategy. Being short vol may be a good trade at this level, but money management is the key.
· The market is bullish until an uptrend is broken. If you want to be long, identify your trailing stop loss levels. A rise this steep is prone to sudden reversals/corrections.
· Enter contango trades to boost 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.
