Volatility Weekly, 04/22/2021: Puts are back with a vengeance

BTC has had a respectable $13K range since our last report. The market made a new all-time high, but was unable to maintain the momentum and crashed in a violent weekend session. We wrote in our previous commentary, “Ideally, we are still targeting the $68,000–70,000 level on this move. Given that the stochastics is getting in the overbought territory, it would be a reasonable level to take profit or short the market, depending on your positioning.” The market disappointed us by not testing the top of the rising channel, instead reversing earlier than we expected.

Hopefully, our readers were nimbler than we were on covering risk. The hedging had to happen in cash, since the futures market was closed during the selloff. Rallies to the trendline are to be sold now until the channel is regained. While we are still in a bull market, the slower moving support is much lower in the low $30K’s. Given that we are oversold, it is possible that we will consolidate or rally until the oversold condition is resolved. That seems to be the opinion of the option market since Implied Volatility is down after such a violent move:

Realized 15-day volatility is up sharply from 49% to 71%. The IV’s are pricing a more measured movement from here.

Skew changes are some of the largest we have seen in a while, with calls down and puts up across maturities. The April skew has done a complete 180, with calls now cheap and puts dear (especially given the drop in the IV). Only by September is the put skew still attractive, just less so than before. June smile is almost back to a typical shape while still slightly on the low side.

Let us review the recommendations from our last report:

· April puts are attractive on a spread to ATM or calls.

· June and September puts are attractive in a Vega neutral spread to straddles.

· June smile is the cheapest on the board (we prefer to lean Vega neutral or slightly short).

April puts are winners vs. all other options on gamma and skew. We do not like them any longer. We would prefer calls here vs. puts or ATM options. It is getting close to expiry, so traders need to be mindful with position sizing and decay management.

June and September leveraged put spreads are winners on skew and Gamma and losers on Vega. We would be reducing June skew positions as they are approaching fair levels. September is still attractive, but one needs to potentially scale down Vega exposure accumulated in the selloff.

June smile is a big winner, with puts rallying more (and on larger Vega exposure) than calls falling. While still attractive, we would start pairing down the trade as the edge is being priced out with the market move.

This week’s recommendations:

· April calls are attractive on a spread to ATM or puts. Manage position sizing this close to expiry.

· September puts are attractive in a Vega neutral spread to straddles.

· Reduce June smile exposure.

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.

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