In today’s commentary we will address the BTC option markets.
Since the end of June, BTC has been in a narrowing price wedge. The bulls’ hopes for immediate gains beyond $12,500-$13,000 have not materialized, while the bears have been unable to break through $9,500. As a result, realized volatility has come off from low-100%’s to below 50% on the 10-day moving average. As of result of this situation, most long option strategies lost money. We were skeptical of the call skew after the violent initial move up, but puts did not perform admirably either — they just lost you less money. Long put, short call strategies may have been slightly profitable depending on your hedging prowess and timeliness of exit. However, given the wide bid-offer spreads in options, even those profits were unlikely to have been large.
Technically, wedges often lead to breakouts, so option traders and hedgers need to start thinking about their strategies at, or past, the September 27 expiry. There are two reasons the end of September is significant:
- The technical wedge reaches its convergence point around that timeframe.
- Bakkt’s launch (September 23rd) may provide a market catalyst.
Implied volatility has come down (and justly so) as long traders are bleeding money with realized vol still under implied. The most surprising development is that as volatility came off and the call skew decreased, the put skew failed to move higher. September vol at 67.5% may still be heavy for the next few days, however, we do not believe being short at this level through the Bakkt launch and September expiration is prudent. December at 75.5% and March at 79.75% are fair and so is the call skew; the put skew is flattish in December and outright negative in March. We do not believe it is representative of BTC market, at least historically, and shows complacency from the bulls.
- We believe puts (with 0.20 delta and below) represent the best value in this market. Miners and hedgers should take a hard look at these structures.
- Given Gamma and skew underperformance, Strangles are better than Straddles (potentially even on a ratio spread between the two).
- Short-dated strangles (September and October) offer good risk/reward in case of an end-of-September breakout. If decay is a short term concern, selling some straddles for the next 5 days may be appropriate.