As we are writing this BTC is $10,900 vs $7950 on May 22 at the time of last commentary. The market has gone parabolic. While we have successfully exited a bear market, we have had no retracement and have concerns over sustainability over such a steep trajectory. At $40,000 the BTC market would be approaching a trillion USD market capitalization. Our readers and we need to ponder if this emerging asset class is ready for the big leagues. For comparison all gold ever mined has a current market cap of roughly 8.5 trillion USD.
The implied volatility in the mid 90’s is not surprising after such a large move but is historically elevated. The skew is strongly to the calls. Puts are almost flat to At-the-Money Straddles, which is historically low. We think it is going to be challenging to continue to make money in calls unless running the “naked” or unhedged anticipating a continuation of the rally. This situation allows miners to hedge their production in atypically inexpensive ways.
Miners should consider if it is wise to hedge at least some of their operations after a 150% rally. It is not whether we are going higher; it is if they are comfortable with retesting $6000 or below. Even though puts are relatively cheap, they are not cheap outright. Therefore, selling calls and buying puts or selling calls against production is wise if there is sufficient cash on hand to satisfy margin requirements. Selling futures that are substantially over spot is also an option (for both miners and HODL’s as a yield enhancement).
· Sell September 15000 call buy September 9500 put around flat (midmarket)
· Sell December 18000 call buy December 9000 put around flat (midmarket)
· Sell December 20000 call for $1250
· Sell September futures contract almost $400 over spot (over 14% annualized yield) or December over $600 over spot (11% yield).
Players looking to get long through option strategies should consider buying call spreads. We do not like selling wings in general but low delta 1x2 in December look very attractive if you have capital to sell the wing call options (Nasim Taleb will probably never shake our hands after this suggestions). December $22,000/$33,000 1x2 call spread is free with pain beyond $44,000 in 6 months. Alternatively, a less aggressive stance is to be long put short call hedged, betting on underperformance of the skew.
· September 2019 short 18,000 call long 9500 put for $210 cash outlay (hedged .50 delta with futures at $11400, or cash BTC at $11,030) is the recommendation. We prefer a cash hedge betting on cash to futures convergence by expiry.
Let’s review our recommendations as of last Option trading report (05.22.2019):
1. June 28th 11000/6500 fence vs $7950 is 7.25% to the call vs historically at parity or slightly over to the put (.40 delta structure). We believe that the skew is likely to underperform from these levels. If you have not closed the trade now is as good time as ever. The trade cost you $50 to put on and $380 to take off. Even if you have not hedged gamma on the way up you’ve made 0.4*($10,900-$7950) on the hedge. $750=0.4*(10900–7950)-50–380 is your profit, unless you’ve exited earlier.
2. June 12000/13000 cs at $45 is more attractive to us than either of the options at $160 and $115. The structure is $55 at mid-market so not a huge winner or loser either way. We would recommend exit it if you can.
3. June 12000/14000 1x2 is premium to the 2. Reasonable way to get long a continuation of this move with pain starting if $16000 is breached in 25 days. This CS is now premium to the 1 and you’ve made at least $65. We would buy back at least on leg of $14000 call and delta hedge the rest.
4. June 7000 and 6000 puts are less than 2% apart (historically over 6%). The 1x1.5 is vega and gamma neutral (.075 delta). We would recommend selling the higher put with the ratio adjusted to fit your view on vol and price. Because of massive gamma these are more of a mixed bag and depend on how you’ve managed gamma. They are likely to have been winners on a 1x2 and small losers on a 1x1.5. If they were done live the structures are winners.