This weeks Option Flows with Tony Stewart starts with commentary of last week’s implied vol pump illustrated a facet of human nature that option shorts cover and FOMO enter before longs act.
Last week’s implied vol pump illustrated a facet of human nature that option shorts cover and FOMO enter before longs act. Market positioning critical. Discomfort trumps comfort.
BTC hesitation ~13k also tested long Call option beliefs, as IV retraced. Some weak, most strong.
2 / Few lose money taking profit, so it’s natural for some to cut exposure. Much of this has been very near dated, often retail.
Institutional funds have maintained long exposure. Group discussed commitment, lower relative % portfolio, peer comparisons, ease and compel fortitude.
3 / However, 2way Calls has evidenced exposure reduction for some institutions too, but smart in execution.
As highlighted before, rolling of long Oct+Nov ITM Calls to Nov+Dec OTM Calls, reduces delta + premium at risk.
When IV spiked, OTM Calls sold to lock-in Call spreads.
4 / So instead of taking all profits, either:
a) rolling long ITM Calls to higher strikes (taking partial profits but maintaining notional exposure) or
b) if Call is ATM, selling a higher strike to capture premium, maintaining notional exposure up to the short strike.
5 / Practical examples:
a) Own Nov27 12k Call, purchased at $300, now value $1800. Roll 12k to Nov 14k Call $600 (1x or >), take profit in case of retrace, maintain notional+ exposure.
b) Own Dec 13k Call, purchased at $500, now $1500. Sell out Dec 16k Call at $500, cost covered.
End / Many scenarios, these two ubiquitous, when the urge to lock-in profit is countered by further upside thoughts. The ratios don’t have to be 1-1 in example ‘a’ – if IV low, 1ITM Call can be rolled to multiple OTM Calls. If IV high, less optimal to buy multiples; see more of ‘b’.
Option market reacting to BTC resilience in the face of risk asset weakness.
BTC correlation ongoing argument, but US election + European lockdowns creating uncertainty and higher VIX+V2X.
Risk management resulted in large Call restructuring and muted but notable Put hedging.
2 / As BTC approached Jun19 spot highs, BTC ITM Calls rolled upwards, egs Nov12+13k Calls to 14k, Dec13k to Dec16k; arguments for this discussed yesterday.
On the rally from 10k have predominantly seen initiated Put sellers, so a few buyers around the 12k strike was conspicuous.
End / The rally still brought out short-covering eg Mar14k Calls moved to Jun16k x1.5k and also Call buying 18-20k x500+.
Implied vol has firmed as Jun19 high touched, but lag levels seen prior at this spot level (last rallies parabolic +high RV) and do not yet mirror global nerves.
Deribit executed its largest block trade. Yet despite the size, the forensics are like ‘picking bits of pollen off a mouse’s handkerchief’.
What we know:
Entity requests high strikes. Has form buying OTM Calls size.
Jan 32k Call x4k
Jan 36k Call x16k
Now down the rabbit hole…
2 / Initially both publicly printed as a buy (price over mark value), but as if the size was 1/1000th of what it was.
For this kind of size, if both were bought, the size would warrant a much higher offer. So trading so close to value might suggest a ratio trade 1×4 (4k x 16k).
3 / Ratio spreads tend to trade nearer value as there is less risk. Even so, both sides of the trade would have had to be axed to execute at these levels. Possible, but not convincing.
However, sometimes a ratio trade is used to disguise intentions.
Now the possible logic…
4 / Jan 32k $62.42, Jan 36k $39.85. 1×4 = ~$97 per contract.
If buying the 1×4, you collect ~$388k at expiry, unless BTC >36k, in which case losses get really bad very quickly.
But why bother with a 1×4 just to effectively state you thought BTC will be <36k in Jan. Just sell Calls.
5 / On the way up, perhaps vol+theta drifts in and the buyer, buys back the short 36k Calls, leaving him net long the 32k Calls. But again, that implies a slow move up, which is not what you want if long the 32k Calls. Could have just waited and bought 32k Calls at some point.
6 / If hedged (and also if not) you start to consider the greeks. A massive rally likely brings an explosion in upside OTM Call vols, the shorts are unbuyable, risk management incredibly challenging.
The benefits from this trade more exciting selling the 1×4 (net buying options).
7 / There is a real chance (which I can’t substantiate; circumstantial due to one of the involved parties) that both Calls were bought, ie 20k net exposure. There is a possibility that this got into an ego battle, whether ratio/naked Calls, as the trades were split into tranches.
8 / This wasn’t a widely marketed trade, likely 2 parties only. Orignal levels:
Jan 32k Calls x4k (0.0047BTC, 84.3% IV)
Jan 36k Calls x16k (0.003BTC, 87.5% IV)
Now the Calls are trading higher IV: 88%, 93%, with smaller buyers in both and other upside Calls.
End / There are a few reasons these Calls have increased in vol:
a) Twitter narrative excitement on this large trade – has led to other smaller upside Call buyers.
b) Trade executed post expiry, pre-US session – generally low point in vol.
c) long Call buyer adding/squeezing short.
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