Spec Trade Idea: U (9/27/19) $10,000/$8,000 1x3 put spread

We at BitOoda see trading volatility as a potential Alpha Generating Tool.

We try to identify catalysts that are likely to heighten volatility and structure tactical trades with favorable risk vs reward characteristics to capture these opportunities. We see the launch of Bakkt on 9/23/19 as one such identifiable event.

Firstly, launching a physically-delivered BTC futures contract is a significant deal for this asset class. We don’t see Bakkt significantly cannibalizing existing BTC volume. In our opinion, we could see institutional capital that has never traded Digital Assets before accessing our market through Bakkt because it represents a regulated solution that has made this product prohibitive from a compliance standpoint for most traditional funds and asset managers. In addition, longer term this makes the chances of seeing a BTC ETF get approved a lot more realistic. Hopefully it will mitigate the concern over unregulated, unreliable spot market venues.

A risk to this bullish thesis is if the Bakkt launch gets postponed, however our trade is structured to capitalize on that scenario. We are looking at selling the U (9/27/19) $10,000/$8,000 1x3 put spread (selling the $10,000 put once, buying the $8,000 put three times):

  • This structure is currently worth $188 in our model to COLLECT premium
  • This is a delta neutral trade (-2 delta ref $10,650 spot)
  • We feel buying the $8,000 put is cheap vol relative to the rest of the curve (weak put skew)
  • We believe it is best to be set up long gamma into the Bakkt Launch

Scenarios:

  1. A slam off in BTC price is best case, as gamma dramatically increases and the 1x3 gets you delta short on the way down (-25 delta vs $9,000 spot; -54 delta vs $8,000 spot; -95 delta vs $7,000 spot)

b. A rally higher, whether a grind up or a rip, allows you to collect the premium that you sold in the structure (on the rally the 1x3 remains ~delta neutral)

c. Market doesn’t move — you pay a daily theta bill which currently is $1,007.13 per 100x300 contracts per day
d. Worst case is a grind lower — if we pin $8,000 BTC on the day of expiration you will have a maximum potential loss of $2,000 per contract ($10,000-$8,000=$2,000) less the premium collected when initiating the trade.

How do you trade around this structure?

Within each of the 4 scenarios listed above, there will be opportunities to trade around this initial structure, or close out the position all together.

  1. If we see a slam off in BTC price, you will want to buy some deltas (as we have seen buying the dips in BTC has been a good strategy over the past few months) You can do this simply buying spot. However, if BTC sits around the long strike, your theta bill will increase decaying (options losing value). You could SELL puts in September or December, or , sell a Fence (sell put, buy call) in December to get long deltas AND cover your theta bill.
  2. On a rally higher BEFORE THE LAUNCH DATE, you could buy back the structure for less than you sold originally and take a small profit and de-risk incase the launch is delayed, or a stampede of shorts enter the market putting your short $10,000 strike into play of going ITM.
  3. Same as scenario B.
  4. On a grind lower, if you feel as though BTC will sit around $8,000 and not slam through or rally back, you can sell out of 2x of the 3x $8,000 puts you are long and turn the position into a naked 1x1 put spread. The maximum loss of $2,000 per contract less the premium collected when initiating the trade will be offset but whatever you sold the 2x $8,000 puts for. For example, if you are able to sell the $8,000 puts for $300 each, your max loss becomes $2,000 — $600 = $1,400 less the premium collected when initiating the trade.

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