Market Update: 7 Oct 2020
Last night we officially had the pulling of the US stimulus bill, taking BTC back to its familiar short-term trendline support again. Even after two tests of this trendline last week, on Bitmex charges and Trump’s Covid diagnosis, BTC is still holding above the 10,500 support level. A break of this level would likely negate an extension higher in the short-term. However, we need to see a break below of the key 10k level to have any downside follow-through (Chart 1).
In between these levels we are likely just treading water and building momentum until after the elections — when we think the coast will then be clear for a new bull trend to develop.
Trump and McConnell delaying any stimulus till after the election is a big gamble on a Republican clean sweep again, and could wind up with nothing — especially if we get a split congress and lame-duck President. So far all the bad news have been absorbed extremely well by markets, and even with this we’ve only retraced the gains from the prior week. Still remains to be seen when any pre-election de-risking would take place, but its much closer now that no positive catalysts remain for markets (apart from some magical vaccine).
In the crypto space, the massive deflating that Defi in the past week has contributed to downside pressure — with Defi token prices dipping sharply, average farming yields have normalised to back under 10% APY now. This has been a drag on ETH which is now sitting on 340 support level. Defi has seen a very quick boom and bust cycle but we definitely think it is here to stay. And if these cycles continue we can expect significant impact on crypto volatility, particularly ETH.
We think in this scenario a high delta short vol strategy on BTC is still the best, with a heavy skew towards selling the call side. Month-end 11k calls still yield north of 40%, and weekly puts under 10k are still high above 30% should the market continue its indecision.
On ETH we are flat, having moved our book to BTC — as we think ETH vol is underpriced right now compared to BTC, especially in the longer-tenors of 1m and above (Chart 3 — ETH-BTC 3m realized vol at range highs, but Chart 4 — ETH-BTC 3m implied vol at range lows).
