Market Update: 22 Dec 2020

Finally through 20k after these years, although it did break sooner this round than we thought. Real demand from largely price-insensitive institutional buying drove us into that level, and the resulting fireworks we saw on the break came from the leveraged side — as roughly half the market’s outstanding leveraged short positions were liquidated. Even then overall net OI went up — as according to Skew, CME itself added half a billion longs in the past week itself (Chart 1).

Chart 1

Needless to say gamma realized massively last week, with the week’s move being the largest absolute weekly gain in BTC history, not to mention the multiple 1000 point swings between 22k & 24k.

Our Elliot wave and Gold consolidation view was invalidated with the break, but in terms of positions no change to what we have on or to our trading outlook. We think we were just early in calling Wave 4, and continue to like selling vol on both sides, still weighted towards puts for now and also to low delta strikes — where we expect the decay to be the highest.

Chart 2

On the call side — the immense magnitude of buying last week and peak euphoria seen especially in mass media, whilst price still remained stalled under 24k over the weekend (Chart 2) gives us confidence that any further gains from here will rather be in step ladder fashion — and therefore low delta longer dated calls remain overpriced. Case in point being even after this parabolic breakout the June 72k remains at the same level as when the contract was launched in late Nov with BTC spot at 18k (Chart 3). We continue to like selling this at 6–7% yield unlevered and also the newly launched Sep 100k at 5–6% yield unlevered.

Chart 3

On the put side, with impending regulation appearing less heavy-handed than previously feared, growing institutional participation across all wall street segments and retail Fomo setting it sharply — we think for the extended time being any large dips from here will still be bought up.

Chart 4

The 20k spot level however is now our firm bull/bear line, with 16k as our strong support. We are lightening up on selling puts up here, as this week brings our very well flagged Christmas expiry, which is now officially the largest OI on record with well over 100k BTC notional (Chart 4). With such a massive quarterly rally, its much less important to look at individual strike OIs but rather in options terms the option market’s max pain point which lies somewhere between 19k-20k for this expiry, and this could act as a magnet for spot this week (Chart 5).

Chart 5

Nonetheless as with all other large month-end expires we’ve seen in 2H this year, a vol crush should be expected right after expiry as short vol positions are rolled. This month however, with the holiday season right after and a large number of ITM options, might mean the vol crush turns into a vol bleed thereafter rather.

Chart 6

Finally with Microstrategy now the de facto institutional leader for BTC — the just released announcement that they have completed their final TWAP purchase could signal a potential turning point for the market into Wave 4, considering it was their announcement that kicked off this last leg of Wave 3. This has taken place much earlier than market expected — which implies they were a large part of the part week’s move higher. Unless fresh catalysts that we mentioned in our previous broadcast emerges, we could be looking at an extended consolidation from here, considering the weak Q1 seasonality (Chart 6) and risks associated with the new administration after Biden’s inauguration in mid-Jan.

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