Bitcoin (BTC) options volumes experienced a significant surge on October 23 and 24, reaching the highest level in over six months. This spike in activity coincided with a remarkable 17% increase in the price of Bitcoin over the same two-day period. Traders are now questioning whether the increased activity in the BTC options market is solely due to anticipation of a spot Bitcoin exchange-traded fund (ETF), or if the optimism has decreased following the recent price surge above $34,000.
The recent gains in Bitcoin are quite rare, especially when considering the cryptocurrency’s impressive 108% year-to-date performance. The last time such price action occurred was on March 14, when Bitcoin experienced a 25.2% increase in price, surging from $20,750 to $26,000 in just two days.
Of particular significance is the fact that a staggering 208,000 contracts changed hands in a mere two days. To put this into perspective, the previous peak occurred on August 18, with a total of 132,000 contracts exchanged during a period when Bitcoin’s price dipped by 10.7%. Additionally, Bitcoin’s options open interest, which measures outstanding contracts for each expiration, reached its highest level in over a year on October 26.
This surge in options activity has led some analysts to highlight the potential risk of a “gamma squeeze.” This theoretical analysis focuses on the need for option market makers to cover their risk based on their projected exposure. According to estimates, BTC options market makers may need to cover $40 million for every 2% positive move in Bitcoin’s spot price. However, when compared to Bitcoin’s daily adjusted volume of $7.8 billion, this amount appears relatively small.
When assessing Bitcoin options volume and total open interest, it is important to determine whether these instruments have primarily been used for hedging purposes or neutral-to-bullish strategies. Analysis of the demand difference between call (buy) and put (sell) options can assist in determining this.
During the period from October 16 to 26, there was a predominance of neutral-to-bullish call options, with the ratio consistently remaining below 1. This suggests that the excessive volume observed on October 23 and 24 was skewed towards call options. However, the landscape changed as investors sought protective put options, with demand reaching a peak of 68% higher on October 28. More recently, the ratio shifted to a neutral 1.10 on October 30, indicating a balanced demand between put and call options.
To gauge the confidence level of Bitcoin option traders, it is necessary to analyze the Bitcoin options delta skew. When traders anticipate a price drop, the delta 25% skew tends to rise above 7%, while periods of excitement see it dip below negative 7%. On October 24, the Bitcoin options’ 25% delta skew shifted to a neutral position after residing in bullish territory for five consecutive days. However, as investors gained confidence due to the resilience of the $33,500 support level, the skew indicator reentered the bullish zone below negative 7%.
Two noteworthy observations emerge from this data. Bitcoin bulls who utilized options contracts prior to the 17% rally were paying the highest premium relative to put options in over a year, indicating extreme confidence or optimism, likely fueled by expectations of the spot Bitcoin ETF. It is also worth noting that even after a 26.7% increase in Bitcoin’s price leading up to October 27, the negative 13% skew remains. Typically, investors would seek protective puts to hedge some of their gains, but this did not occur. This suggests that the prevailing optimism has endured as Bitcoin soared above $34,000.
In conclusion, the surge in Bitcoin options volumes and the increase in open interest suggest that market participants are actively speculating on Bitcoin’s future price movements. The recent price rally and the anticipation of a spot Bitcoin ETF have likely contributed to this heightened activity. However, it is important for investors to conduct their own research and exercise caution as every investment and trading move involves risk.