Trading Strategy: Brace yourself for a potential volatile weekend

Our last trading idea, the 25Dec20 24K/16K Risk Reversal has worked well thanks to the recent market correction. Worth less than $200 at the time, it is now trading $750 ($16,700 ref). Benefiting from the spot and implied volatility move, it would make sense to close or reduce this position and take profit.

But we have to remain vigilant as this weekend could be very volatile. We are just coming out of several weeks of market exuberance where positive news were pilling as fast as we were crossing strategic barriers. The +$3000 points drop from Wednesday highs to Thursday lows has created great tensions in the market. More than a billion dollars worth of positions have been liquidated in crypto in a matter of hours. So far, for most of the investors the pain is mild. Looking at some recent volumes we can estimate that the average bought price over the last weeks is in the $15K-$16k region and that’s where the real pain could start.

As we can see in the graph below, the low $16K region offers a support line that has worked well since mid-October. If we break through, we could be quickly looking at $14k.

If we look in past for some indications for how the market could correct we can look at the 2015–2017 bull market. During that time, there were 9 significant corrections with an average decline of 37%. Since the beginning of the bull market, last march, the deepest correction was less than 18% in early September when the market failed to break $12,000, only to fall back under $10,000. For indication a correction of 37% from Wednesday highs will bring us back to $12,200.

Source : @PeterLBrandt twitter

Another piece of data we like to look at is exchanges net flows. Even if for quite some time the general trend has been investors moving their assets out of exchanges to send them to dedicated custodians/defi projects/lenders, we can still correlate the acceleration of inflows with market corrections. We see in the graphs below that the outflow trend has slightly reversed (at least momentarily). With more than 17k BTC of deposit on the 26th of November, that day was among the 3 biggest daily net inflow for over 1 year. It is even more significant if we consider the fact that the 26th of November was the day OKex reauthorized withdrawals.

Also, as we said in our last note, with long term trend of investors taking their coins off exchanges and ETP crypto long funds like Greyscale growing exponentially, the free float has been greatly reduced, creating volatility on the upside when the Fear of Missing Out is dominating and on the downside when Fear, Uncertainty and Doubt is taking over.

As of today, we are right in the middle of the long thanksgiving weekend. US traditional banking system (excluding the crypto players like Signature and Silvergate) were closed on Thursday. Most of the US investors are on a break and most likely back at home, even if the Covid-19 has probably reduced the number of people travelling for this occasion.

When we look at the data below compiled over the last 365 days (average hourly % of return for BTC ) we see that most of the positive returns have happened during week days and during US hours. The feedback we got from various OTC counterparties concerning these last weeks rally paints the same picture, i.e. a bull market driven heavily by US investors.

So in a context of general low liquidity accentuated by the US holidays, the coming weekend could be extremely volatile.

Over the last days, the 1 month implied volatility has gained close to 20 points and the 25d skew has moved from -25% to -10%. It makes then sense to reduce or close our risk reversal and put on a small premium strategy to get some downside protection and lock in our gains, in case the market would bounce on the low 16k support.

A short term put spread seems adequate. the 04dec20 16k/15K put spread is currently worth $165 with a potential max value of $1000 (ref BTC at $16,700). It has a -15 delta. At expiry it will be profitable if BTC expires below $15,835, 5% away from here. If the trade is profitable on Sunday evening or Monday morning (European hours), we would strongly advice to close it before our Yankee friends wake up and try to buy the dip. Happy trading !

Source:
Tradingview.com
Skew.com
Cryptoquant.com
@PeterLBrandt twitter
@nic__carter twitter

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The information and opinions contained in this research report have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to its’ accuracy or completeness. Unless otherwise noted, all research reports provide information of a general nature and do not address the circumstances of any particular investor. Neither Covario nor its affiliates accept liability whatsoever for any investment loss arising from any use of this research report or its’ contents.

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