Yesterday we gave an update on BTC volatility and options. In summary, we saw a spike in implied volatility (options prices) that correlated with the rally from $10,000 to $14,000 BTC. The call skew blew out, i.e. the wingy calls became rich relative to at-the-moneys. As we have trudged downward over the remainder of July, the implied vol and blown out call skew have settled back down to reasonable levels.
As we mentioned at the end of our piece, we wanted to lay out a HEDGE that would be meant for a miner or HODLer of BTC. When looking at getting into an effective hedge, the tenor is an important consideration. The futures curve currently remains in Contango; therefore, we want to take advantage of what the market is giving us. The December CME futures are trading roughly $175 higher than the August future, which means the options prices in December will be priced from this higher level. The second consideration is the decision to outlay premium or not. Since we feel that options are trading at relatively rich implied vols, we think it would be ideal to lessen the premium outlay by selling options (calls) against the long protection to the downside (puts). This structure is known as a fence, or a collar. The final consideration in coming up with an effective hedge are what strikes to pick. The downside strikes can be chosen in a few ways. Calculating a breakeven price of a mining operation for profitability based on input costs (electricity, hardware costs, ongoing maintenance, etc.) could be one stratgey for choosing a strike. Another method is to use technical analysis and find out where there could be a sharp breakdown in price.
Looking back to 2018, the $6,000 level in BTC was that key level where prices kept bouncing until the mid-November collapse. Over the past few weeks we have seen this ~$9,000 level get tested several times in which BTC has been able to bounce. The pattern we saw last summer could be repeating itself, and if this $9,000 BTC level cannot hold, one can argue that a hard selloff would ensue. The call strike which will be sold can also be chosen in the fashion of technical analysis. Since we saw the sharp rally earlier this month, followed by a very hard selloff from that $14,000 level, we can make the assumption that there is strong resistance in this area. Therefore, the December Z (12/27/19) $9,000/$14,000 Fence (Collar) for ~$400 of premium outlay can be a structure initiated by a hedger to protect themselves below $8,600 ($9,000 — $400) while capping the upside to $13,600 ($14,000-$400).
If you are in the business of managing a good mining facility, or building a new protocol or running a new business, speculating in the price of BTC should not distract you from your main focus. Using derivatives to minimize your risk of losing value on your balance sheet can help you grow that business in a steady manner while maximizing its potential and profitability. If you do not want to endure the pain of last winter, we strongly suggest to consider these options to help you and your investors sleep at night.