BTC is up $6000 over the last week. The market has worked off the overbought conditions that brought us to the $58K high and is currently retesting a very steep short term trendline from the downside.
The basis (contango) is back to more typical levels (spot to March around $390) and March/April to $600. There is less beta in the basis trade than what we have observed. We wonder if some of the carry trades have been connected to GBTC premium to NAV turning negative (currently in the -4.5% range, see https://www.theblockcrypto.com/data/crypto-markets/grayscale ). Rumors abound connecting borrowing activities in BTC and GBTC shares that may have to be unwound.
Realized 15-day volatility is little changed at 112%. IV is little changed, with nearby months slightly lower. However, IVs not rising on a rally is terrible for calls. In July and September call skew is down and puts are only slightly firmer. In March, the smile is flatter on both sides in a more symmetrical manner.
While put skew is still the cheapest, the smile is starting to look too flat, with calls becoming attractive on relative basis.
Let us review the recommendations from our last report:
- Smile is fair in March, with vol still on the higher side. We suggest pairing down March option structures until a clearer risk reward opportunity presents itself.
- Smile is still cheap In the June-September period (especially the put side). It has strengthened, though, from our last writing. We lean towards either reducing overall position or buying back some of the ATM options to keep Vega exposure constant (smile structures decayed and moved into shorter Vega exposures due to time and IV change).
- Move basis trades from March into April to capture wider spreads. We are not overly aggressive here as the contango is not extreme given recent history.
We are glad to have recommended exiting March smile positions. Given the weakness in the March smile, traders should look to put on wings vs ATM option structures (long the wing).
Our readers stayed safe in the term put skew positions. It may now make sense to add to calls as well.
Traders had opportunities to add to the basis exposure, as the spread to March has normalized. Contango out the curve is more typical as well.
This week’s recommendations:
- Smile is on the cheap side in March and cheap in July-September. We recommend modest exposure in the front and increased wing to ATM position further out. Puts are still the cheapest relatively, but calls have become attractive as well.
- Reestablish a moderate basis exposure. Keep some powder dry as the spreads have somewhat underperformed on this rally.
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.