A week ago (1/3/19), I wrote a piece on RISK MANAGEMENT recommending purchasing a March Fence (aka a collar) for firms that are long ETH in their inventory. The trade was to buy the H $100 puts and sell the H $250 calls against it. When we sent out this report last week, the market for the fence was -8/8 (worth flat premium). Today, the market 0/16 (worth $8 — put premium). The value of this fence went from flat to $8. You potentially could have hedged ~$8 (less fees) to offset the ~$20 of losses incurred today by this ETH selloff.
The following day (1/4), my morning report was in regards to the Constantinople event. I explained that there could be uncertainty with this forking catalyst, and markets could see “tumultuous price action”. Let’s review the options that were put in front of you last week and include todays comments and results in red:
- Without taking a directional view, buying Straddles is the most efficient way to get long GAMMA and could give you the opportunity to scalp potentially choppy market conditions. Potential Exit Strategies are to:
- Not having a constructive delta view, one should GAMMA hedge the options position, and with that, timing is key. If you can capture a GAMMA scalp BEFORE the fork date due to a price move from ANTICIPATION today, and then capture a second GAMMA ScalpAFTER fork date from the REACTION, you could lock in some profits if you GAMMA scalp today you can lock in minimal profits up to date, but would still look for another large move before the expiration of the options to offset the remaing Straddle premium decay:
- At this point you can sell-to-close the Long Straddle and get back any remaining premium from the options structure On the date of this report the F $150 straddle was worth $30 — Today it is still ~$30 [Break-even]
- Or ride out the options to expiration and seek a settlement as far away from the strike as possible you would need a further selloff in ETH for the $150 straddle to be profitable
- If you have a BULLISH view on the direction of ETH after this catalyst, we think that the recommendation should be to buy ATM Calls F $150 calls were worth ~$15 on 1/3/19. Potential Exit Strategies are to This trade is currently a loss:
- Simply sell-to-close the Calls you are long you can sell the calls for ~$5 and lock in a $10 loss (lose $10 on $15 = -66% ROI)
- GAMMA Hedge with ETH and lean your delta in the direction you are biased in that moment Calls are Out-of-the-Money so no applicable
- Sell the new ATM Calls (ie. If you purchase the $150 Calls and we rally $20’s, then you would sell the $170 Calls, legging into this Call Spread for free or even potentially a credit). Another way to lock in the loss — adding more risk/reward to the trade: not recommended
- If you have a BEARISH view on the direction of ETH after this event, we think that the recommendation should be to buy ATM Puts F $150 puts were worth ~$15 on 1/3/19. Potential Exit Strategies are to This trade is currently profitable:
- Simply sell-to-close the Puts you are long F $150 puts are worth ~$25 today and you can lock in a $10 winner (make $10 on $15 in premium, a 66% ROI)
- GAMMA Hedge with ETH and lean your delta in the direction you are biased in that moment You can buy ETH FULLY-HEDGED (100 delta), or UNDER-HEDGED (50delta):
- Fully-Hedged would mean you want to be long DELTA in ETH, profiting from a rally or bounce off of this move lower. You would purchase the same quantity of ETH as you are long the puts. This would lock in ~$5 of profits if you purchase ETH ~$130 (Spent $15 on the $150 puts, and made $20 on this selloff). After locking in this $5, you would still be long PREMIUM from the options you are long
- You can under-hedge by only purchasing 50% of the quantity of ETH as you are long the puts. The profits locked in would be 50% of the $20 selloff seen today. Since you paid $15 for the puts, and made $10 on the GAMMA (50% of $20 selloff), you would have locked in 2/3s of the premium spent on the options. As stated above, you want to GAMMA hedge AFTER the fork date from the REACTION of ETH price. This under-hedge gives you a chance to purchase the second 50% of ETH at a lower price and potentially increase profits compared to the $5 locked in by FULLY HEDGING. Once again, you would still be long PREMIUM from the option you are long
- Sell the new ATM Puts (ie. If you purchase the $150 Puts and we sell-off $20’s, then you would sell the $130 Puts, legging into this Put Spread for free or even potentially a credit). The value of the F $130 puts today are ~$10. If you sold these, you would have legged into the F $150/$130 PUT SPREAD for a debit of ~$5. This means that the MOST you can lose is the premium spent (the $5 debit) and the most you can profit is $20 ($150-$130=$20) if ETH is $130 or LESS on expiration (1/25/2019) [Risk $5 to make $20]
This may be a lot to digest, so if you have any follow-up questions or want to talk through any of these trades step-by-step, please give us a call and we can continue to help educate you in how to PRESERVE CAPITAL, or make SPECULATIVE GAINS.
Founder and CEO
Executive VP of Institutional Sales
Dr. Ilya Kurland
Chief Derivatives Strategist
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