Rare Gains in Bitcoin Options Market Signal Potential “Gamma Squeeze” Risk
In 2023, Bitcoin has seen rare gains in its options market, with a surge in activity and increased trading volume. This is significant considering Bitcoin’s impressive performance this year, with a 108% increase in value. The last instance of such price action occurred on March 14 when Bitcoin experienced a 25.2% price increase in just two days.
The surge in activity has led to speculation about the potential risk of a “gamma squeeze.” This theory suggests that option market makers may need to cover their risk by buying large amounts of Bitcoin if its price continues to rise. Analysts estimate that for every 1% increase in Bitcoin’s price, options dealers would need to buy $20 million worth of Bitcoin.
Bitcoin Options Volume and Open Interest
When analyzing Bitcoin options volume and open interest, it is important to consider whether these instruments are being used for hedging or bullish strategies. The demand for call (buy) and put (sell) options can provide insight into investor sentiment.
From October 16 to October 26, there was a predominance of neutral-to-bullish call options, indicating optimism among investors. However, there has been a shift towards protective put options recently, suggesting increased demand for downside protection.
Confidence Among Bitcoin Option Traders
To gauge investor confidence in Bitcoin’s price movement, the delta skew of Bitcoin options can be analyzed. A positive skew indicates anticipation of a price drop, while a negative skew suggests excitement and optimism.
On October 24, the delta skew shifted to a neutral position after being bullish for five consecutive days. However, as investors realized that the $33,500 support level was holding strong, their confidence improved, leading to a re-entry into the bullish zone.
Extraordinary Options Premiums and Continued Optimism
Prior to the recent price surge, Bitcoin bulls using options contracts were paying the highest premium relative to put options in over 12 months. This indicates extreme confidence and optimism, potentially driven by expectations of a Bitcoin ETF.
What is remarkable is that even after the price surge, investors did not seek protective puts to hedge their gains. This suggests that the prevailing optimism has endured as Bitcoin reached above $34,000.
Hot Take: Increased Bitcoin Options Activity Raises Speculation of Gamma Squeeze
The recent surge in Bitcoin options activity and increased trading volume has raised concerns about a potential “gamma squeeze” in the market. This theory suggests that option market makers may need to buy large amounts of Bitcoin if its price continues to rise, leading to explosive price movements.
While it is still unclear whether the increased activity is solely due to anticipation of a Bitcoin ETF or if investor optimism has waned following the recent price surge, it is clear that the options market is experiencing unprecedented activity and heightened interest in Bitcoin.
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