Happy Friday. Today we will do more of a deep dive into our Options Indicators piece from 2/27. In our previous piece, we discussed the ways of looking into options for clues as to where the underlying price will go. One of the potential indicators would be observing the options market to see if it has positive or negative call/put skew. In our commentary we stated, “While analyzing this chart over the last week after this volatile price action, we have not seen a major shift one way or the other in regards to this skew.”
Today we dive a little deeper…
It seems that the range-bound nature of BTC price action since December of 2018 ($3275-$4300) has weighed on the option market. The dramatic drop in realized volatility has weighed on the implied volatility of options.
That is understandable. However, what is unusual is that the option selling has affected the value of out-of-the-money options even more. Put skew, call skew and the smile are ALL down. Call skew has turned negative, and put skew is the lowest since the summer of 2018. Put skew in the March (3/29/19) options contract is significantly flatter than even that of June (6/28/19) options. Given the “gappy” way BTC trades and the suppressed implied volatility, breakout trades are very cheap to initiate. While these trades may be cheap for a reason, it does not cost you much to buy the March $3,250 put (roughly $15–20 vs. $3890) or $4250 call (roughly $50–55). As a ‘live’ option trade (unhedged), this can be a good way to capture profits in case the range breaks. As a ‘crossed’ or ‘delta neutral’ trade (option that is hedged with corresponding underlying delta), profits can be made through gamma trading even if the range holds. For hedgers, taking advantage of the cheap put skew relative to history should also be worth considering.
Please feel free to contact Dr. Ilya Kurland for more information on trade structuring and/or option trade recommendations. Finally, the BitOoda team wishes you all a wonderful International Women’s Day!