The BTC market has gone sideways in the two weeks since our last Volatility report. The market made a new high of $61750 but was unable to hold the gains and is back below the fast-rising trendline that defined this move since early December 2020.
As the market struggles with the speed of ascent, we wonder when we will see a pull back to a more slowly rising trendline that is currently around $30000.
Realized 15-day volatility has come down to 76.5% from 112%. It put pressure on option prices throughout maturities. This is the lowest IV’s we have seen since 12/15/2020. It is almost back to “normal” levels for BTC (which is in the high 70%’s).
The largest structure changes are increases in Put skew in options through June, and Call skew in September. We now view Skew and Smile as close to fair except for September put skew still being attractive, especially given lower level or Implied Volatility.
Contango has been oscillating around typical levels. However, March/April collapsed all the way to $200 today. It is the same as we saw before February expiry. We do not understand why expiry would have such a pronounced effect. The basis trade to April is not attractive. Traders should look further down the curve for better levels or wait for a better entry point.
Let us review the recommendations from our last report:
- Smile is on the cheap side in March and cheap in July-September. We recommend modest exposure in the front and increased wing to ATM position further out. Puts are still the cheapest relatively, but calls have become attractive as well.
- Reestablish a moderate basis exposure. Keep some powder dry as the spreads have somewhat underperformed on this rally.
Smile trades are relative winners all the way around. In March, the sideways action destroyed the ATM options through decay. Further out puts or calls made relative value trades profitable. Moreover, Dropping IV’s moved smile positions into a shorter Vega, adding PnL to structured spread portfolios.
This week’s recommendations:
- Smile is fair in April. IV came down to levels where it makes sense to use options for directional bets or protection on linear positions.
- The only skew exposure we recommend is long puts vs ATM in September.
- Exit short April positions in basis, if you have to maintain positions in deferred futures.
The entirety of this report attempts to identify the best option structures available. Readers should overlay it with their directional view by under-hedging or over-hedging their preferred option structure.