Bitcoin (BTC) options volumes reached their highest level in over six months on October 23rd and 24th, coinciding with a 17% rally in the price of BTC over two days. Traders are now speculating whether this increased activity in the BTC options market is solely due to the anticipation of a spot Bitcoin exchange-traded fund (ETF) or if optimism has diminished following the recent price surge above $34,000.
The recent gains in Bitcoin’s price are particularly significant, considering the lackluster performance of the cryptocurrency in 2023. Despite its impressive year-to-date performance of 108%, such price action has been rare. The last time Bitcoin experienced a similar surge was on March 14th, when its price jumped 25.2% from $20,750 to $26,000 in just two days.
In terms of options volume, a staggering 208,000 contracts changed hands in just two days, marking a significant increase from the prior peak of 132,000 contracts exchanged on August 18th. Interestingly, Bitcoin’s options open interest, which measures outstanding contracts for every expiration date, reached its highest level in over 12 months on October 26th.
This surge in options activity has led some analysts to highlight the potential risk of a “gamma squeeze.” This theory suggests that option market makers may need to cover their risk by buying significant amounts of Bitcoin if its price continues to rise. According to estimates from Galaxy Research and Amberdata, options market makers may need to cover $40 million for every 2% positive move in Bitcoin’s spot price. However, compared to Bitcoin’s daily adjusted volume of $7.8 billion, this amount seems relatively small.
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To gain a better understanding of the intention behind the increased options activity, it’s essential to analyze the demand for call (buy) and put (sell) options. From October 16th to October 26th, there was a prevalence of neutral-to-bullish call options, with the ratio consistently remaining below 1. However, the landscape changed as investors began increasingly seeking protective put options, reaching a peak of 68% higher demand on October 28th. More recently, the metric shifted to a 1.10 ratio on October 30th, indicating a balanced demand between put and call options.
To assess the confidence of Bitcoin option traders, it is crucial to analyze the Bitcoin options delta skew. The delta skew measures the difference in implied volatility between out-of-the-money call and put options. On October 24th, the delta 25% skew shifted to a neutral position after being in bullish territory for five consecutive days. However, as investors gained confidence in Bitcoin’s price remaining above $34,000, the skew indicator reentered the bullish zone below negative 7% on October 27th.
Interestingly, the data also reveals that Bitcoin bulls who utilized options contracts prior to the 17% rally on October 23rd were paying the highest premium relative to put options in over 12 months. This negative 18% skew indicates extreme confidence or optimism, likely driven by expectations of a spot Bitcoin ETF. Furthermore, despite the significant price increase of 26.7% in the 15 days leading up to October 27th, there was no surge in demand for protective puts. This sustained optimism suggests that investors remain positive even as Bitcoin soared above $34,000.
In conclusion, the surge in BTC options volumes and open interest, coupled with the shift in demand for put options and the sustained confidence of option traders, indicate a significant level of activity and optimism in the market. While the anticipation of a spot Bitcoin ETF may be a contributing factor, the recent price surge has not dampened sentiment. However, as with any investment or trading activity, it is important for individuals to conduct their own research and exercise caution.
Disclaimer: This article does not provide investment advice or recommendations. Every investment and trading decision involves risk, and readers should conduct their own research before making a decision.
