In this week’s edition of Option Flows, Tony Stewart is commenting on a quiet market with FOMC and CPI coming up.
Gamma RV now <25%. 7day IV >50%.
IV holding despite premium.
Theta eating away.
Discussed dynamics last thread.
But now FOMC+CPI this week gives a new dilemma.
Option flows quiet.
Accumulation Jan+Feb 13-15k Puts 1k+
Mar 23k Calls sold 1k
Dec Puts+Calls bot, Gamma supplied.
2) No directional clarity from flows, although the limited slow accumulation of Jan+Feb downside perhaps suggests some caution after any legacy market Santa rally.
Immediate flows in Dec show a mixed bag, with 16k Put and 18k Call bot, but ATM sold too.
Dec16 bump pre CPI+FOMC.
3) Questions to be considered ahead of CPI+FOMC:
– How much current IV>RV premium is Crypto backdrop, how much CPI+FOMC priced in?
– If CPI/FOMC moves S&P will it move Crypto? Beta?
– Buying for D-neutral Gamma, or naked direction?
– How will IV react after?..if right/wrong?
4) The question is always more than is it cheap?
– If buying event Gamma, how long do you hold?
– Considered exit liquidity?; will MMs make it easy for you to sell Options back to them?
– are you expecting change in the crypto-vol environment?
– how is the market positioned?
Usually these pure Gamma events bring backwardation as the desire for Gamma outpaces medium-term Vol.
Currently we see only a Dec16 expiry blip, which suggests bets ok if very low premium (unlikely to be considering IV data).
Otherwise the curve in Contango.
6) To limit exposure to vol, if you want exposure to the event, then Call/Put spreads or Collars are simple possibilities.
If looking to sell into the event given IV>RV by 25%+, the question is timing. Will Dec16 IV squeeze, will MMs buy offsetting supply across term-structure?
View Twitter thread.