TA Tuesday: What is in store for the future?

As of writing, $BTC is trading at $38,655 (+4.43% in 7 days), $ETH is trading at $2,758 (9.23% in 7 days), and the spread is trading at 0.071.

Trends do not look very promising right now: cryptocurrency market cap jumped from $2.893T on 11/8/2021 to $1.769T today (down -38.85%), S&P500 -5.27% in one month, Nasdaq -8.27% in one month and VIX is trading at $24.86.

The probability of a 50bps rate hike in March – recovered from the FED Funds Futures – is now at 15%; prior to the last FOMC meeting, the probability was 6%. The last time a 50bps rate hike occurred was in May 2000.

In terms of futures:

BTC Futures Open Interest is $14.7B (as of mid-August 2021), BTC Futures Annualized Rolling 3mth Basis on CME is 2.68% (6-month average: 5.23%), and funding rates are slightly negative at all the exchanges.

As for options:

BTC options open interest is $6.6B (same as in August 2021), 3-month BTC At-The-Money (ATM) implied volatility is trading at 67.5% (6-month average: 84.9%), 3-month BTC 25D Skew is trading at 9%, and the most popular strikes are:

– $40k (18.2k contracts, put/call ratio: 0.456);

– $50k (14.6k contracts, put/call: 0.18);

– $30k (12.2k contracts, put/call ratio: 0.99).

If skew traders are making the most of their profits by riding the rapid changes in term structures, and increasing the selling pressure on the futures market by selling perpetuals, I believe that now is the time to play a different game.

Implied volatility is currently really cheap, positive skew is not sustainable in the long run, and continuous coverage via put is expensive.

What makes the most sense to me now is to buy volatility.

One way to do this is to buy a long-term call option combined with a short futures position, which allows you to acquire both a positive basis yield and a reversal of the skew.

Implied volatility and realised volatility typically converge, so that an increase in IV will be followed by an increase in spot volatility.

As the IV will be led by long calls, higher implied volatility will result in a potential rally. I therefore expect spot prices to rise along with the basis. But only time will tell.


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