From the Desk of Captain Obvious:
RIOT is up.
It's doubled in price over the course of about 10 trading days, due to its exposure in the crytpo space... the run to 50k in BTC is helping as well.
I want to put on a bearish trade, looking for... not a full round trip of the most recent rally, but a good giveback of the gains. This will most likely be coincident with a rug pull in BTC, and most likely a risk-off trade across the total trading environment.
I've been hesitant to get super bear-ed up into the front side of these rallies, but I think there is a good opportunity here if structuring your risk right.
Let's first talk about what probably won't work: buying puts in March. Here's why:
Highlighted in yellow are the implied vols for the March options board. 240% is entirely too rich, and what will most likely happen here is what we have seen when these parabolic names start to give back their gains...
The IV gets crushed.
We saw this recently in TLRY:
On Feb 10th during the parabolic spike, the March 30 puts were 4.45x4.65 with an implied vol of around 300%.
Right now, those same puts are trading 6.20x6.35 with an IV of 205%.
That means, on a stock that went from 77 dollars premarket and got cut by 50% in 2 days... the put value increased only by 2 bucks. Not much there.
So that's the dynamic I'm looking for-- a hard stop run in the stock, but the March IV comes down while longer dated options stay bid.
Here's the trade setup:
I paid 4.30 for the spread, and you can get a better fill if you leg into the trade.
This is a very elegant setup because it takes advantage of the current term structure in the RIOT options board.
And if we see a pullback, the implied vol in March will start to drop, and the Jun options will stay around the same IV, because longer dated options are not as sensitive to short term changes in IV.
Opex breakevens show 20 and 65, but those will probably tighten up over time.
If RIOT has some monster move higher and I completely miss the top on this, you will be shocked at how well this spread will hold up. When I did put calendars in TSLA's parabolic move, I was about 2 days earlier and the stock ripped higher... but we didn't see any change in the value of the calendar due to some options voodoo.
So I expect that this trade shouldn't have a ton of heat initially and we don't have to stress about the near term price action in the stock.
Now le'ts say the stock completely crashes and comes into 40... what I will then do is close out the long Jun puts and just hold onto the March puts naked... this will require margin, and you can buy a March put to cut down that margin.
Also, if the stock stays elevated for another month, I can just roll the short puts to April for a credit and continue to reduce the basis in the trade.
Update: May 19th, 2021
Closing the trade for a profit.