Is it time to 'buy' volatility?

“Short term volatility is greatest at turning points and diminishes as a trend becomes established”

George Soros (2003). “The Alchemy of Finance”, p.170, John Wiley & Sons


It’s been a few weeks since Dark Pools has made an appearance in your inbox…

Here at Astronaut Cap, we hate sending out pointless emails for the sake of it. How many more times do you need to hear about China’s love/hate relationship with crypto or the never-ending fights between crypto exchanges anyway?

Let’s talk about something interesting.

About six weeks ago, we wrote a segment about an options strategy called ‘Covered Calls’, which allows you to ‘Sell’ volatility in the hunt for extra yield in the market. This strategy is getting more popular by the day, particularly amongst portfolios that are sitting on a stack of BTC.

Today however, our focus turns to ‘Buying’ volatility, in which we elaborate on more directional strategies that are conducive to the current market conditions (at least for now).


Implied volatility for BTC options is really really low right now..

One of the factors that makes up the pricing of puts and calls in the options markets is implied volatility. IV, as it is known, measures the markets expectations of large moves/volatility, and builds this into the options premium.

When IV high, you pay a-lot more when buying a Put or Call. When IV is low - the opposite occurs… and IV is really low right now.

[We thank our friends at Skew, who provide the best derivatives data in the market. You will see us reference them constantly through our material.]

The above chart shows the Implied Volatility for Bitcoin relating to at-the-money (ATM) options. This means the strike price closest to current spot value.

Current volatility is near absolute lows, with the most active 3-month contract at only 67% IV, and the 1-month at 55% IV.

To further expand on this point, we compare Implied Volatility vs Realised Volatility, which illustrates the former against a historical metric (open and closed ranges in the underlying market.)

So what does this mean for options trading?

Well when we were talking about Covered Calls a few weeks ago, IV premiums were high, meaning those people selling calls against their BTC holdings could generate a very nice yield due to a spike in premiums.

Looking at the current market however, the opposite is true. This means that the buying of puts or calls for directional trading purposes is of relatively good value on a historical basis.

For a refresher on buying Puts and Calls see here.

Buying an ATM Put essentially means that you are taking a bearish view on the market, while buying an ATM Call means that you are taking a bullish view.

With this aside, the real value in directional trading of options is in the expectation of increased volatility. As IV is one of the main components in options pricing, a sudden spike in market volatility can lead to a rapid increase in premiums (irrelevant of whether you are holding a call or a put).

Those who are able to buy volatility at the right time can benefit from this strategy in a huge way.

We aren’t here to give you trading recommendations, but..

If you have your head around options trading, or just want to learn more, there are a few strategies to look at in times of low volatility.

Buy a Call or Put - A strategy in which you are taking a one-directional view on the market (either bullish or bearish).

Buy a Straddle - A strategy in which you buy both an ATM Call and a Put, expecting the market to move significantly in either direction. (The end result is that you lose on one trade and hopefully do extremely well on the other).

Buy a Strangle - The same as a straddle, however each leg is bought Out-of-the-money (OTM) therefore reducing upfront cost of premiums.

Vertical Spreads - Used to take advantage of a directional move, but reduces the potential profit by lowering the premiums (selling vol at a different strike).

Learn what you can now

Options are a segment that will be heating up alot in the near future. We have seen the options market evolve significantly in recent months (thanks Skew), and with the launch of Bakkt options in December and CME options in January, this will only add fuel to the fire.

But be careful. Options are extremely complex instruments and such derivatives are fraught with liquidity risk if you don’t know what you are doing. (AKA, none of this was/is trading advice).

Stay safe out there.

Until next time,

Matt

Astronaut Capital


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About Astronaut Capital

Since 2017, Astronaut Capital has been one of the leading asset-managers for cryptocurrencies and digital assets. Utilizing its internal research team at Picolo Research and STO Rating, Astronaut operates long/short strategies to navigate the market on behalf of investors.

For subscription information about our investment funds, visit www.astronaut.capital or follow us on twitter.

Crypto ETP's... The struggle is real.

“We don’t have an analytical advantage, we just look in the right place.”

– Seth Klarman


For as long as I can remember, the crypto ecosystem has been hell-bent on getting the nod of approval from global regulators for Exchange Traded Products (ETP’s), generally in the form of seeking approval for an ETF.

It’s clear why this has been an important proposition.

For your average mum and dad or HNW investor, buying and securely storing large sums of Bitcoin shares similar traits to brain surgery.

For us we think it’s simple right?

Just KYC with an unregulated exchange > transfer a limited amount of Fiat > activate 2FA > Buy BTC (don’t buy the wrong Bitcoin) > buy a hardware wallet > store your seedphrase > transfer to your hardware wallet.. then perform the exact same process in reverse to sell…

Simple right :|

Not everyone is a Cypherpunk.

Speculators are speculators. They don’t care about owning physical Bitcoin or the impending armageddon of the global financial system. They simply want to buy something that is regulated with oversight and feel safe knowing someone is taking care of the rest. Hopefully one day, they make some money on it..

This is what makes the current state of passive listed crypto products all the more painful.

In this issue of Dark Pools, we look at the sad state of 3 ETP’s in the global market.

1. The Bitwise ETF got killed by the SEC yesterday

It’s as if the SEC got tired of rejecting crypto ETF’s yesterday and instead delivered a massive nail in the coffin to Bitwise and any other company that was even contemplating doing the same.

In a 112 page report (a very good read), the SEC focused a large part of their disapproval on the fact that they don’t trust the Bitcoin spot market, and for that reason, cannot reasonably be convinced that an exchange traded product would not be subject to manipulation from the underlying.

“the Commission does not agree that the relative fungibility of an asset makes it inherently resistant to manipulation and notes that fungible assets, such as securities and exchange-traded derivatives, trade subject to substantial regulatory oversight and surveillance-sharing agreements that would be unnecessary if fungibility were sufficient protection against manipulation.”

If anything, it’s our view that this very extensive response from the SEC is to make prospective companies aware that an ETF for the US is not on the cards anytime soon.

2. Coinshares at risk of getting their ETN shutdown by the FCA

The FCA in the UK have a bone to pick with Coinshares. The company has a listed ‘note’ on the Swedish Nasdaq with just shy of $1 billion in AUM. The thing is, it’s really hard to tell what this $1billion is actually backed by..

You see, when you buy the Coinshares ETN, you aren’t actually buying a security that has Bitcoin as the underlying asset. What you are buying is actually a note promising that the obligation/assets will be fulfilled by a counter-party (which seems to be separate and incorporated in Jersey). We’re not going to FUD Coinshares because they are having a hard enough time as it is, but going through the counterparty’s 2017/2018 public filings, we struggled to match up the numbers ourselves. In any case, their XBT tracker has been around for some time, so we are most likely missing some of the updated information. It’s just a really complicated structure to say the least..

In addition to the preceding, the derivative is supposed to synthetically track the Bitcoin price, which creates additional layers of complications for the FCA and their stance.

Essentially, the FCA isn’t just attacking Coinshares, but also CFD providers. It would seem that they have a real issue with synthetically tracked and complicated structures that are aimed at retail… maybe rightly so?

Read the FCA Paper here - it’s good.

3. Grayscale is still here - but it’s not exactly an efficient ETP

We’ve written about Grayscale in the past so we won’t spend a lot of time on this one. Essentially, Grayscale lists its trust several times a year as a close-ended structure. It is notoriously known for:

  • trading at a massive premium of between 20%-40% of underlying assets

  • taking most of its subscriptions as ‘in-kind’ from BTC (not fiat)

  • not providing any guarantees for redemption

We don’t see Grayscale as a real listed product that can be available to the masses, but we have to give them points for trying. It trades around 3m shares per day and they seem to be out of sight from the regulators crosshairs so that seems to be a plus..


It’s clear that regulators in the West aren’t particularly in favor of Bitcoin ETP’s. In our view, a regulated retail-focused product is still a bit of a stretch, but the stars are aligning for passive structures that focus on a more sophisticated/accredited market that can handle the risks.

But then again, maybe we are wrong? We sure have seen crazier things happen in this market.

Cheers

Matthew Dibb | CIO


About Astronaut Capital

Since 2017, Astronaut Capital has been one of the leading asset-managers for cryptocurrencies and digital assets. Utilizing its internal research team at Picolo Research and STO Rating, Astronaut operates long/short strategies to navigate the market on behalf of investors.

For subscription information about our investment funds, visit www.astronaut.capital or follow us on twitter.


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Hunting yield: Crypto Covered Options vs Lending

“I think investment psychology is by far the more important element, followed by risk control, with the least important consideration being the question of where you buy and sell.”

- Tom Basso, Trendstat Capital


With Bitcoin continuing to trade in what seems like an infinite range of choppiness, the hunt for yield and market neutral strategies continues.

This week we had a blast at Invest Asia in Singapore, where we could firmly see the market excitement over the theme in our last edition of Dark Pools – Lending.

In this edition of Dark Pools we want to uncover a more dynamic but early-stage topic.

I caught up with a good friend of mine, Bobby Ong, from Coin Gecko, who really put the idea in my head to write about this - thank’s Bobby.

Crypto Options as an Income Strategy

While it’s a vast and technical topic, I am going to make this as concise as possible. For the purpose of this edition we are going to specifically look at the use of ‘covered calls’ to generate consistent recurring income, and following that, we will analyse just how successful this strategy is in comparison to our last theme, Lending.

The Basics of Options

For those who are new to options, as Investopedia defines:

“An options contract offers the buyer the opportunity to buy or sell the underlying asset. Unlike futures, the holder is not required to buy or sell the asset if they choose not to.”

There are both call option (gives the holder the right but not the obligation to buy an asset) and put option (gives the holder the right but not the obligation to sell an asset), with numerous strategies to go about executing them.

Covered calls on BTC – a strategy for the ‘yield investor’

The covered call strategy is known as a neutral strategy. Similar to lending, it means that you aren’t expecting a substantial increase in price of the underlying asset.

The word ‘covered’ means that you already own the underlying asset that you are writing options against. If you don’t own the underlying asset, it is known as ‘naked’, which we may cover in a future edition.

Here is an example of how covered calls on crypto work.

The trade

  1. You currently own 1 Bitcoin which is deposited in your Deribit account. The price is currently trading around $10,000 as of today.

  2. In your belief, you think that Bitcoin likely will not rise to $12,000 by the 27th of September (this is the next expiry and only 15 days away).

  3. With this in mind, you sell an ‘Out of the money’ call option with a strike of $12,000 and receive a credit of 0.019 BTC (roughly $195). This credit is now yours. You own it.

The expiry

There are two scenarios that can then occur when the 27th of September reaches.


Scenario 1: BTC ends above $12,000 strike price (exercised)

If, for example, BTC is at $13,000 on the 27th of September, your option that you sold can be exercised, meaning that you have to sell the BTC for the agreed price.

You still made a really healthy profit which equates to a total position of 1.019 BTC, and a USD value of at least $12,195. Effectively, your upside is capped at this figure. If BTC continues to go up, you won’t make any more money.

The person who bought the Call contract from you will effectively be able to buy that BTC off you for $12,000, even though it has a current market price of $13,000. They can close it out for a profit or let it ride.


Scenario 2: BTC ends below $12,000 strike price (not-exercised)

If on the 27th of September, BTC is at $11,000 for example, the option you sold will not be exercised and the person who bought it from you will be holding a worthless contract.

You get to keep the credit you received, keep your Bitcoin, and have just increased your asset-base by 0.019 BTC in 15 days. In addition to that, BTC is also trading at $1000 more than it was when you sold the call.


Options vs Lending - compare the yield.

Looking at BTC options on Deribit with respect to the above example, an out-of-the money (OTM) call option, expiring 27 sep (15d) @ 12000 strike, would cost 0.011 BTC.

This translates into a 1.1% yield for 15 days (30% ann.) for investors looking to sell those options.

If one were to lend BTC on Binance, the returns would be 0.001151 BTC (3% per annum.) per BTC across a 14d period. Hence for the option speculator, there is theoretically 10x more returns to be made if one was to sell OTM calls for a 30% annual rolling yield.

Based, on these metrics, the yield for writing BTC options is materially higher.

Note: It’s almost impossible to forecast consistent annual yields when writing options, hence we have extrapolated such returns by utilizing the same ‘rolling average premium of an OTM strike price’.

What about the risk?

Of course, the discussion above on options and outright lending is not an apple to apple comparison, and with several assumptions that has to be made. One might contemplate that the risk involved might be huge as options trading would not protect your initial principal as compared to lending. However, as fund managers, it’s all about the risk and reward, and we contemplate that the current yield disparity from selling options versus outright lending is too great to be ignored.

Another example if the former is not convincing enough..

Putting things in contrast, we refer back to the traditional markets. An Apple (AAPL) 15d OTM call option with a strike of 10% above its current price would cost 8 bps, while a similar option in BTC would be priced at a whopping 275 bps.

There are a-lot of moving parts.

We don’t want to fool you, options are complex and there are alot more to them than meets the eye. If you want to go down the rabbit-hole to learn about Strike Prices, The Greeks, Credit Spreads and more, check out a few of these links below.

About Covered Calls, Understanding the Greeks, Credit Spreads

Until next time,

Matt

Astronaut Capital


Talk to us about our new investment fund

Learn more about Astronaut Capitals’ new accredited investor liquid fund. The fund is open to institutions, family offices, corporate investment firms and select accredited investors.

Download fact-sheet


About Astronaut Capital

Since 2017, Astronaut Capital has been one of the leading asset-managers for cryptocurrencies and digital assets. Utilizing its internal research team at Picolo Research and STO Rating, Astronaut operates long/short strategies to navigate the market on behalf of investors.

For subscription information about our investment funds, visit www.astronaut.capital or follow us on twitter.

The sudden rise of digital asset lending

 “It is not good to be curious about all the reasons behind price movements.”

- Jesse Livermore; Reminiscences of a Stock Operator


The crypto market is a place of themes.

In 2017 we had the rise of dApps. In 2018 it was fight for the best and most scalable protocol. This year in 2019, the focus has been on buy/burn utility tokens via exchanges.

Looking around the market today, one can’t help but notice a new theme gaining significant traction and awareness - Lending.

Most of us have heard lending platforms like Nexo have processed over $700m, MakerDAO having $250m+ total value locked, and as recently as days ago, Binance announcing their first wave of lending products to their users. Having said that, we shall skew towards an informational series in this issue of Dark Pools, taking a dive deeper into the topic of ‘crypto lending’.

Digital Asset Lending – Defining the concept

Here at Astronaut Capital, we prefer splitting “crypto lending” into 2 segments, where both concepts are relatively similar; when a borrower takes a loan from the lender in return for an interest income.

1.     Traditional lending (Stable coins)

2.     Securities lending (Non-Stable coins)

There is not much explanation needed for the first point, as the lending of stable coins operates similar to fiat lending. Think of bank loans, student loans, and mortgages. Instead of earning a meagre interest of 1% from traditional banks, one can lend via stable coins to earn a higher interest rate, 8% (Nexo) and 10% (Binance). Hence, it isn’t surprising to see a ~4x growth in locked collaterals for lending, according to DefiPulse.

Now, for the second segment, things are slightly different. As Investopedia defines:

Securities lending is the act of loaning a stock, derivative or other security to an investor or firm... generally conducted between brokers and/or dealers and not individual investors.”

Traditionally only open to institutional investors, retail investors are now able to participate and get a share of the pie. However, one great difference lies in the fact that “governance rights” are not being transferred to the borrower in crypto lending, which does not concur with the traditional space. This leaves several caveats, and whether this will surface sooner or later remains to be seen.

So, who are the lenders/ brokers?

Many avid crypto enthusiasts will know there exist a whole myriad of lending platforms from centralised to decentralised in nature. Our desk took the liberty to present the more popular below.

Browsing through the table, opportunistic traders with an eye for detail would immediately point out an investment opportunity, termed carry trade. It is a strategy that borrows at a low-interest rate and re-investing at a higher interest rate to earn on the difference.

Then what about the borrowers?

Many of these borrowed tokens are also utilized to exploit market opportunities such as shorting an overvalued security/token. Yes, this does improve market efficiency; however, it does not apply for most of the circulating tokens out there. Try borrowing and shorting a token that is rank #250 on CMC, it will not be easy. And this boils down to the significant risk surrounding this industry, credit / counter party risk.

What does this mean for “lending” tokens?

BlockFi’s recent $18.3m Series A funding announcement is one of the few pieces of evidence that investors are taking notice of this sector. The desk at Astronaut Capital, in general, has been bullish on the finance sector of the crypto markets, as we believe this is one of the first steps in building a successful crypto ecosystem and a more efficient market. As the saying goes, the financial system forms the backbone of any economy.

A ‘fad’ or the beginning of something big?

Market sentiments are nowhere near perceived bullish sentiments as price discovery of “lending” tokens have remained relatively subtle. Several pieces of the puzzle are yet to be resolved, such as governance rights (imagine a user borrowing tokens to influence the bureaucratic decisions of a platform, during the lending period), market accessibility, and regulatory headwinds just to name a few.

Having said that, it's not that we are pessimistic about the lending space. Volume and demand in recent months is extremely impressive. Our issue relates more to the track-record (or there lack-of) of companies/projects facilitating such activities on behalf of market participants.

Put simply, there are too many ‘unknown unknowns’ and it takes just one bad apple to ruin the bunch.

We will continue to monitor this segment of the market, and expect the lending marketplace to look extremely different in the coming months, particularly with the recent announcement of Binance Lending and the upcoming launch of institutional lending by LendingBlock.

Until next time,

Lennard Neo & Matt Dibb


Talk to us about our new investment fund

Learn more about Astronaut Capitals’ new accredited investor liquid fund. The fund is open to institutions, family offices, corporate investment firms and select accredited investors.

Download fact-sheet


About Astronaut Capital

Since 2017, Astronaut Capital has been one of the leading asset-managers for cryptocurrencies and digital assets. Utilizing its internal research team at Picolo Research and STO Rating, Astronaut operates long/short strategies to navigate the market on behalf of investors.

For subscription information about our investment funds, visit www.astronaut.capital or follow us on twitter.

Get Liquid with Astronaut Capital

We really hope you have been enjoying our weekly issue of Dark Pools by the desk at Astronaut Capital and Picolo Research.

We do our best to give you a taste of some of the random analysis and thoughts that we have going through our head every week. One thing is for sure; there is never a dull day in this market.

Also, a quick ‘thank you’ to the thousands of new subscribers that have joined us in the last few weeks. Keep sharing and spreading the word!

On that note, we mentioned that we have some big news to be released.

Since early 2017, Astronaut Capital, together with its independent research-house Picolo Research, has guided investors through the crypto market by leading in due-diligence, analysis, and above all, transparency.

Today, we roll out another chapter.

The Astronaut Capital Liquid Crypto Fund

The team at Astronaut are pleased to announce the launch and opening of the Astronaut Capital Liquid Crypto Fund.

Over the past 12 months, the management of Astronaut has gained feedback from a targeted segment of institutional, corporate and accredited investors to form a vehicle that is safe, flexible, liquid and above all, transparent for investment into digital assets.

Not just another Index Fund

The rise of index funds and single-asset exposure vehicles have flooded the market of late. While much of this can be attributed to the recent outperformance of Bitcoin, there is little doubt that the Alpha in years to come will be from exposure in growth and emerging digital assets.

The Liquid Fund differentiates itself from ‘long-only’ index structures by taking exposure in fundamentally sound emerging projects whilst still adhering to the liquidity parameters of high-turnover secondary markets.

With the ability to hedge and create ‘net-short’ exposure through seasonal and cyclical declines, the strategy puts risk mitigation and capital preservation as one of its highest priorities.

Birds-eye view

The investment fund is a traditional structure and operates as a long/short vehicle for the trading of cryptocurrencies.

  • The mandate is focused on liquid-only crypto exposure with the ability to take positions both long/short based on fundamental, qualitative and technical analysis

  • The investment strategy is conducive to deployment of large amounts of capital, with the flexibility of quarterly redemptions for large subscribers

  • Investments decisions are driven by our team at Picolo Research and the Astronaut Capital Investment Committee

  • The fund is traditional structure (non-tokenized), audited, fully custodized and registered under CIMA

  • Subscription is open-ended for institutional investors, family offices, venture capital firms and select strategic accredited investors

Request data room access

Download the 2-page fact sheet

For those who believe they meet the requirements for subscription, we have put together a short fact-sheet detailing the overview of the fund and the asset allocation strategy.

Download

We are extremely pleased with the level of interest and subscription to the fund so far. Should you wish to learn more, please request access to the corporate data room by clicking here.

. . .

Looking for smaller exposure?

Chat to us about the ASTRO Tokenized Fund.

For those who are seeking smaller exposure, Astronaut Capital has also been running the ASTRO Tokenized Dividend Fund since 2017.

The fund has been extremely active in the marketplace with exposure to Pre-ICO’s, ICO’s, IEO’s and secondary market trading.

In the coming weeks, we will also be taking new subscriptions from interested parties for this fund. If you would like to find out more regarding a placement for this quarter, please contact us by clicking here.

. . .

Finally, a big thank you to those who have helped Astronaut Capital along the way. We are currently at a huge inflection point in the digital assets market, and we are privileged to have you join us for the journey.

PS. next issue of Dark Pools dropping soon.

Matthew Dibb | CIO


About Astronaut Capital

Since 2017, Astronaut Capital has been one of the leading asset-managers for cryptocurrencies and digital assets. Utilizing its internal research team at Picolo Research and STO Rating, Astronaut operates long/short strategies to navigate the market on behalf of investors.

For subscription information about our investment funds, visit www.astronaut.capital or follow us on twitter.

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