With realized volatility coming off, implied volatility (that determines option prices) has followed.
Implied volatility is around 60%, which is below long-term averages. The put skew is consistent with historical performance and the call skew is weaker (cheaper) than historical averages (we are in a bear market after all).
While there is no guarantee that seemingly cheap options won’t get cheaper, we see several opportunities for market participants to take advantage of prices:
- Long position hedgers: Miners and long-term investors may want to allocate 5% of their inventory value to hedge their exposure with June 28th 2019 $2,500 Puts (roughly $170 cost or 5% of BTC cost). Part of the expense of the option can be recovered through earning interest if one lends their coins out (roughly 7% annualized or 2.9% through the end of June). [You can revisit our Lending/EFP report here: BitOoda Morning Report 1/11/2019 — EFP Trade ] That makes the hedge only cost 2% of the position when combined with the lending program. A lower strike put is even cheaper but may be less effective.
- Long Speculators: may want to buy calls to take advantage of the suppressed vol and call skew. We do not recommend call spreads given how flat the skew is on the call side. The June 28th 2019 $5,000 call costs around $90 and is a 0.20 delta option (providing roughly 20% of price appreciation on an up move) and has good upside potential with limited downside. A more aggressive long player would want to try to capture both skew and volatility upside by entering a June 28th 2019 $4,250/$5,000 1x2 call spread around costless (we would recommend purchasing 2 options).
- Smile/breakout trade: An entity trading an option book may be more interested in a breakout trade betting that volatility would pick up on a regime change if market breaks out to either side. Buying June 28th 2019 $2,500/$5,000 strangle twice (2x) and selling $3,350 straddle once (1x) collects around $440 of premium and costs only 2.5% to 2.75% volatility points over the straddle. The structure goes from losing time value to gaining in about 22 days if no move happens. At that point a decision can be made to either roll the strikes in or partially repurchase the straddle to increase the breakout leverage.
- Short Trades: One can either purchase puts or put spreads since the put skew is still not depressed. The put spread must be sufficiently wide for the volatility change not to outpace the change due to the price move (in trader speak, your delta and gamma gains should outweigh the likely vega and skew losses).
In shorter dated options, implied volatility is over recent realized volatility but still below long-term averages. This means shorter dated options are relatively expensive but selling them is dangerous in case the regime changes. An aggressive trader would be short close to at the money options but long wings through butterflies trying to collect time value (decay).