Smile Research Genesis Post

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We have been trading live on multiple strategies for over a month and have survived long enough to write our genesis blog post — WOOHOO! Our team is awesome; we have the CEO and CTO from, the former Deputy Head Asia of Exotic Derivatives at BNP Paribas and a former Binancian.

We are a trading firm focusing on the bitcoin options market. This segment is extremely appealing for the following reasons.

The world is entering its “crazy” phase, which is a typical of end of credit bubble cycles. This bubble is inflating to dangerous extremes and policy makers are matching this risk with equally dangerous policy tools in order to avoid a collapse. The US President uses the S&P index as a proxy for popularity and Chinese state media is openly promoting the stock market. This exacerbates speculative impulses, as is exemplified by the popularity of Robinhood and its gamification of reckless risk taking. This bubble will probably continue for longer. However it will not be a straight line upwards. In the words of Doug Noland, we are going through “late stage craziness”. Crazy markets are by definition unpredictable and they could go anywhere.

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Speculative impulses are… CRAZY!

Stock markets can stretch like a rubber band, but unless economies catch up the elastic will eventually either fling back or snap. I was particularly struck by pollution indices published this week in the FT. Only Chinese cities are showing any signs of recovery and the rest of the world is still far behind pre-Covid-19 levels. Optimists will refer to this trend as decoupling, others may view this imbalance as destabilizing.

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Beijing, Guangzhou and Shanghai are recovering, the rest of the world is not

Geopolitics could be a hidden dagger pointed towards the market’s belly. Nassim Nicholas Taleb accurately describes the market’s inability to price in black swan events such as Archduke Franz Ferdinand’s assassination, when stock markets only started reacting long after geopolitical shifts had materialized. It should be a big deal when super powers close down consulates and expel each others’ diplomats, but there really is no way to accurately price that in today’s markets. I am not a sensationalist, the world has never been safer and people rarely make much money betting on geopolitical events. I remain an optimist, but the geopolitical threat is real and the risk of a severe whipping of the market is non-trivial.

Within all investable assets, Bitcoin is among the most speculative. In one of his early videos, Arthur Hayes described Bitcoin as a type of option — either it works and it rises to a very large price tag, or it fails and expires to zero. I am personally very bullish on Bitcoin, but the fact is that I cannot be absolutely certain of its success. Bitcoin’s own narrative changes constantly, regularly morphing from uncorrelated asset and back to correlated asset. A regime change in Bitcoin lasts about 6 months. Its mining reward schedule ensure that there will be extreme volatility until 2140 due to the unpredictability of circulating supply. I think that Bitcoin will go up over time, but I am also confident that it will regularly drop sharply.

In short, the world is a crazy place, markets have gone insane and crypto is an irrational asset class. Bitcoin is like having grenades stacked up into a Russian doll formation. Anything can happen. This is a property that we cherish and we believe that the best way to express this view is through options.

Surprisingly, the Bitcoin options market does not seem to accurately reflect the chances of extreme swings. The smile curve seems flatter than it should be. It does not take much time working in crypto to know that extreme events happen… extremely often!

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Snapshot earlier in July, March Smile only 2%

One explanation for this may be the emergence of structured products on Bitcoin where people sell out-of-the-money options to generate yield. This acts to suppress the wings. We believe that this market structure will persist as long as the structured products market grows faster than the overall Bitcoin market.

The current market offers opportunities for gamma/theta ratios over 20x, which we find extremely appealing. This means that we benefit from market moves but only suffer minimally from time decay. This strategy will perform poorly in a flat market like in early July and will do better when markets move like in the latter part of July.

We welcome any feedback. If you have any ideas to share always feel free to contact us through Twitter. A smile is a curve that sets everything straight!

A smile is a curve that sets everything straight

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