Cryptocurrency Derivatives series: Quick Run Through On Bitcoin Hedging Dynamics On Renewed Sentiments Ahead of Halving Event

Bitcoin (BTC) price jumped more than 8% on a weekly basis, this has been the sixth consecutive weekly rallies as the price edged higher above $7,810 (at Coinbase). 

The volatility was witnessed on account of the F&O expiry session at CME. And, bitcoin seen more than 100% resurgence from the lows of $3818 levels to the recent highs in just one and a half month. Thereby, it has retraced more than 23.6% Fibonacci levels with a stern bullish candle (refer 1st chart).

Quite a few analysts estimate that the pioneer cryptocurrency is likely to keep spiking ahead of the block-halving event.

At this juncture, around 650,000 new bitcoin are mined per annum. The prevailing rate is expected to come down to 328,500 approximately after the upcoming fundamental event.

Such a cut in the number of Bitcoin mining is significant to have adverse impact in its underlying price.

Contemplating the confluence of fundamental and technical driving forces, we’ve accurately positioned our hedging perspectives on BTC using long hedges that have been advocated about a month ago when it was trading at $4k levels. Well, these positions have, so far, been functioning appropriately as per the expectations set-in while recommending.

The underlying price is now equipping to embark northwards. However, the scepticism has still been lingering due to the apprehensions engulfed by the struggling markets. Hence, in addition to the existing positions, we wish to buy 1m (1%) ITM delta call options as we could now foresee further upside traction for the bitcoin price to retest $9,000-10,000 areas in the next quite a few weeks to come. ITM calls are recommended along with the existing long positions in CME BTC Futures of May’2020 deliveries on hedging grounds.

The Rationale (Options Analytics): As the underlying price of BTC is sensing resistance 7,730 level, even if it plunges a bit, it may show dips of around 100 – 130 pips. Thus, we’ve chosen 1% in-the-money calls for our analysis. 

For this privilege or right to buy the underlying security (bitcoin) at $7,600 on May 11, the buyer has to pay premium of $876 for a Bitcoin while NPV is just at $806. He should perceive this as hedging cost, just in case the pioneer cryptocurrency rises exponentially. 

Delta measures the change of an option's premium with respect to changes in the currency pair exchange rate. Another way to think of Delta is as if it's your outright spot exposure (2nd exhibit).

Gamma measures the change in an option's Delta with respect to a 1% change in the currency pair exchange rate.

Vega measures the change of an option's premium with respect to a 1% change in the currency pair's volatility.

Put/call ratio is below 0.8 (precisely at 0.73 levels) which indicates the obligations of buying underlying security (i.e. bitcoin) significantly outpaced those with selling obligations (refer 3rd chart).

Most importantly, open interest is surged for &,000 strikes which is implied that the bitcoin options market is expecting that amid major buying sentiments the underlying price to sense minor dips in the short run.

Please also be noted that there is considerable divergence between ATM IVs and RVs (refer 4th chart), we foresee IV is likely to spike in the days to come which is conducive for the call holders. Courtesy: Skew & Ore