Bitcoin experienced rare gains in 2023, despite its impressive year-to-date performance. The most recent surge occurred on March 14, when Bitcoin’s price increased by 25.2% in just two days, rising from $20,750 to $26,000. This recent price action is significant considering Bitcoin’s options market, specifically the daily volume and open interest.
During this surge, a staggering 208,000 contracts changed hands in just two days, which is unprecedented. To put this into perspective, the previous peak occurred on August 18, with a total of 132,000 contracts exchanged. However, during that period, Bitcoin’s price dropped by 10.7% in just two days. Interestingly, Bitcoin’s options open interest reached its highest level in over 12 months on October 26.
The surge in activity has led analysts to highlight the potential “gamma squeeze” risk. This theory revolves around option market makers needing to cover their risk based on their exposure. If Bitcoin’s price continues to move higher, options dealers may need to buy $20 million worth of spot BTC for every 1% increase, potentially causing explosiveness in the market.
Estimates from Galaxy Research and Amberdata suggest that BTC options market makers may need to cover $40 million for every 2% positive move in Bitcoin’s spot price. While this may seem substantial, it is relatively small compared to Bitcoin’s daily adjusted volume of $7.8 billion.
When assessing Bitcoin options volume and open interest, it is crucial to determine whether these instruments are primarily used for hedging or neutral-to-bullish strategies. Examining the demand difference between call (buy) and put (sell) options provides insight into this ambiguity.
From October 16 to October 26, there was a predominance of neutral-to-bullish call options, with the ratio consistently below 1. However, on October 23 and 24, the excessive volume was skewed towards call options. This landscape changed as investors increasingly sought protective put options, with a peak of 68% higher demand on October 28. More recently, the metric shifted to a neutral 1.10 ratio on October 30, indicating a balanced demand between put and call options.
To assess Bitcoin option traders’ confidence, the Bitcoin options delta skew is crucial. When traders anticipate a drop in Bitcoin’s price, the delta 25% skew tends to rise above 7%, while periods of excitement see it dip below negative 7%.
The 25% delta skew shifted to a neutral position on October 24 but re-entered the bullish zone below negative 7% on October 27. This shift in confidence coincided with Bitcoin’s price remaining above $34,000 on October 30.
Two noteworthy observations emerge from this data. Prior to the 17% rally that began on October 23, Bitcoin bulls using options contracts paid the highest premium relative to put options in over 12 months. Additionally, the present negative 13% skew, following Bitcoin’s 26.7% surge in the 15 days leading up to October 27, indicates enduring optimism among investors.
Bitcoin’s options volumes experienced a significant surge on October 23 and 24, coinciding with a remarkable 17% price rally over two days. Traders are now questioning whether this increased activity in the BTC options market is solely due to the anticipation of a Bitcoin spot exchange-traded fund (ETF) or if the optimism has subsided following the recent price surge above $34,000.
It is important to note that this article does not provide investment advice or recommendations. Investors should conduct their own research and analysis before making any decisions.
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