BitOoda Volatility Report — 10/27/20

BTC’s breakout finally accelerated in the past 7 days. We are up by an impressive (by recent standards) $1700. Since breaking out of the consolidation wedge at $10500, we are up $3150 and finally had the $2000+ move we had been talking about in prior commentaries. The move has been powerful, with stops to consolidate at $11400 and $13000. However, we have not had a retracement of any sort yet. The lack of retracement suppresses realized volatility, which may explain option underperformance on such a sizable move. Our obvious target is the July 2019 high of $13844. If we take that out, there are no obvious levels until the almost $20000 highs of December 2017. In a more mature market, we would advocate for a need to retrace and regroup. We should know soon if BTC gives bulls a chance to reload on a pullback.

15-day realized volatility is up to 45% (from 35%) but is still low by BTC standards.

The IV’s have responded across maturities:

BTC’s breakout finally accelerated in the past 7 days. We are up by an impressive (by recent standards) $1700. Since breaking out of the consolidation wedge at $10500, we are up $3150 and finally had the $2000+ move we had been talking about in prior commentaries. The move has been powerful, with stops to consolidate at $11400 and $13000. However, we have not had a retracement of any sort yet. The lack of retracement suppresses realized volatility, which may explain option underperformance on such a sizable move. Our obvious target is the July 2019 high of $13844. If we take that out, there are no obvious levels until the almost $20000 highs of December 2017. In a more mature market, we would advocate for a need to retrace and regroup. We should know soon if BTC gives bulls a chance to reload on a pullback.

15-day realized volatility is up to 45% (from 35%) but is still low by BTC standards.

The IV’s have responded across maturities:

December call skew is up significantly, catching up and even exceeding March call skew, which is slightly stronger. March put skew is significantly stronger, which is surprising given the rally. We now view the call skew as expensive and IV as reasonable.

Let us review last week’s recommendations:

• In December and March, put skew is attractive and calls are fair. We recommend being long Strangles or Puts either outright or spread to Straddles. As the IV is coming off, strangles are getting even more attractive. Monitor Vega to avoid getting too long, as it keeps underperforming.
• In the front contracts, puts are historically fair, and calls are slightly overvalued. Given the level of IV, both wings are attractive. We recommend being long wings on either side (or both), either outright or spread to straddles if you are uncomfortable with decay.
• Use contango to October to enhance returns.

Strangles did well on both Gamma and Vega. Depending on your book structure, we would recommend lighting up on the calls, as the call skew is becoming less attractive given the move in IV. We are still hesitant to be short call outright given a historically low level of IV. However, a long call spreads position is probably a better trade than a long delta position here from the risk-reward standpoint.

October strangles worked but not to the point we expected due to a lack of retracements in the rally. October IV is still reasonable, but the expiry is so close it is becoming a dangerous race against the decay.

October contango is into the teens. The spread to November is close to $200 and is attractive.

This week’s recommendations:

• In December and March, put skew is attractive and calls are relatively expensive. We recommend being long puts either outright or spread to Straddles. Given the size of the recent move, we would not be short Vega here. If one decides to be short call skew, we recommend expressing it in a Vega long fashion via long call spreads.
• Use contango to November to enhance 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.

December call skew is up significantly, catching up and even exceeding March call skew, which is slightly stronger. March put skew is significantly stronger, which is surprising given the rally. We now view the call skew as expensive and IV as reasonable.

Let us review last week’s recommendations:

• In December and March, put skew is attractive and calls are fair. We recommend being long Strangles or Puts either outright or spread to Straddles. As the IV is coming off, strangles are getting even more attractive. Monitor Vega to avoid getting too long, as it keeps underperforming.
• In the front contracts, puts are historically fair, and calls are slightly overvalued. Given the level of IV, both wings are attractive. We recommend being long wings on either side (or both), either outright or spread to straddles if you are uncomfortable with decay.
• Use contango to October to enhance returns.

Strangles did well on both Gamma and Vega. Depending on your book structure, we would recommend lighting up on the calls, as the call skew is becoming less attractive given the move in IV. We are still hesitant to be short call outright given a historically low level of IV. However, a long call spreads position is probably a better trade than a long delta position here from the risk-reward standpoint.

October strangles worked but not to the point we expected due to a lack of retracements in the rally. October IV is still reasonable, but the expiry is so close it is becoming a dangerous race against the decay.

October contango is into the teens. The spread to November is close to $200 and is attractive.

This week’s recommendations:

• In December and March, put skew is attractive and calls are relatively expensive. We recommend being long puts either outright or spread to Straddles. Given the size of the recent move, we would not be short Vega here. If one decides to be short call skew, we recommend expressing it in a Vega long fashion via long call spreads.
• Use contango to November to enhance 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.