SDX Weekly: BTC Post-Expiry and Trade Idea of the Week

BTC Implied Volatility Term Structure

A deep dive into the IV term structure across varying maturities reveals not just anticipation of market stability around the recent expiry, but a broader expectation of sustained, albeit elevated, volatility levels into the next year.

BTC 1W Implied Volatility vs Realized Volatility

The gap between Bitcoin's realized volatility and implied volatility has widened, reaching the largest disparity seen all year. This divergence suggests that traders may expect a significant adjustment soon, either with the market becoming more volatile than currently expected (realized volatility increasing) or with market expectations (implied volatility) decreasing towards more historical norms.

Despite the recent flush, the spread between RV and IV is still significant. This wide spread suggests that there's room for more volatility ahead. In the longer term, traders might take advantage of the elevated IV by selling long-dated options, as the higher IV means options are priced higher, potentially providing more attractive premiums.

Trade Idea: 05APR-72000/85000 Long Call Spread

While traders may breathe a sigh of relief post-expiry, the key question is what happens next. Will the profits from those lucrative in-the-money calls be reinvested into new contracts, and how will that choice affect the market dynamics? The answers hinge on Bitcoin's ability to use its old all-time high as the new support level. If successful, it could well signal the end of the pre-halving correction period and set a bullish tone for the future.

With a bullish market in view, a more cost-efficient long call spread of 72000/85000 strikes may offer greater convexity, allowing for amplified gains beyond the break-even point of $72,370. This setup not only aligns with the technical narrative of surpassing resistance to establish new support but also optimizes the trade’s risk-reward profile in the event of an upward price thrust.

Potential Outcomes:

1. Best Case: BTC rallies above $85,000, making our call spread well in the money. Traders stand to make $13,000 per contract, excluding the net premium paid.

2. Moderate Case: If BTC fluctuates between $72,000 and $85,000, profit increases linearly with BTC’s price within this range but is limited by the cost of entering the spread.

3. Worst Case: If BTC drops below $72,000, both call options expire worthless. In this scenario, the loss is limited to the net premium paid for the spread, which is ~$340 per contract at time of writing.

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