BTC had yet another uneventful week. The range was $700, and we appear to be happy consolidating in a triangular wedge trying to decide the next move. 10-day and 15day realized vol is 47% and 35% respectively. IVs continue to trend lower throughout the curve.
The biggest skew move is in December, with calls down and puts up. The move in March skew is less pronounced but is also toward puts. Contango is only pronounced to the front contract.
Let us review last week’s recommendations:
- We like the put skew and do not like the call skew in December — March. IV is becoming attractive. Therefore, we recommend being long put, short call (hedged) on a ratio (being long more puts than short calls). Increase Vega position.
- In the front contracts, calls represent the best value either outright or spread to straddles, as call skew is fair and IV is underperforming and not high.
- Avoid spread trading until a better entry point presents itself.
Long put/short call positions are winners unless Vega exposure overpowers the skew gains. Given the levels of IV, we recommend reducing or exiting short calls in December. March skew still has room to come in, but we would be looking to buy back calls on weakness.
Front call skew is slightly down, so calls are only winners if the position was Vega short, collecting theta. We still like the calls spread to straddles in October.
Contango to the October contract expanded from $70 to $105 around the September expiry. It was a good time to reinitiate spread positions. Spreads further down the curve are not attractive at this point from a historic perspective.
This week’s recommendations:
- We like the put skew and do not like the call skew in March. IV is becoming attractive. Therefore, we recommend being long put, short call (hedged) on a ratio (being long more puts than short calls). Maintain flat to slightly long Vega.
- In December, put skew is still attractive but calls have depreciated enough for them to be rolled down so that puts are spread to straddles, not calls.
- In the front contracts, calls represent the best value spread to straddles or meaty puts, as call skew is cheap and IV is underperforming but not high. We recommend flat Vega waiting for a breakout.
- Use contango to October 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.