The recent gains are a rare sight in 2023, even considering Bitcoin's impressive 108% performance so far this year. Notably, the latest example of such price action occurred on March 14, when Bitcoin rose from $20,750 to $26,000 in just two days, marking a 25.2% price increase.
It is worth noting the importance of the fact that a staggering 208,000 contracts changed hands in just two days. To put this into perspective, the previous peak, which occurred on August 18, saw a total of 132,000 contracts exchanged, but that was during a period in which the price of Bitcoin plummeted 10.7% from $29,090 to $25,980 in just two days. Interestingly, Bitcoin options open interest, which measures outstanding contracts for each expiration, hit its highest level in over 12 months on October 26.
This increase in activity has led some analysts to emphasize the potential risk of "gamma compression." This theoretical analysis seeks to capture the need for options market makers to hedge their risk based on their likely exposure.
he #bitcoin Last week's gamma compression could happen again
If BTCUSD rises to $35,750-36k, options traders will need to buy $20 million worth of BTC spot for every 1% bullish move, which could cause explosiveness if we start to rally towards those levels.
further pic.twitter.com/OA9tJ0ZaK9
– Alex Thorn (@intangiblecoins) October 30, 2023
According to estimates from Galaxy Research and Amberdata, BTC options market makers may need to hedge $40 million for every 2% positive move in Bitcoin's spot price. While this figure may seem substantial, it pales in comparison to Bitcoin's staggering adjusted daily volume of $7.8 billion.
Another aspect to consider when evaluating Bitcoin options volume and total open interest is whether these instruments have been used primarily for hedging purposes or neutral-to-bullish strategies. To address this ambiguity, the difference in demand between call (buy) and put (sell) options must be closely monitored.
In particular, the period from October 16 to 26 saw a predominance of neutral to bullish call options, and the ratio remained consistently below 1. Consequently, the excessive volume observed on the 23rd and 24th October was biased towards call options.
However, the picture changed as investors increasingly sought protective put options, peaking at a 68% higher demand on October 28. Most recently, the metric changed to a neutral ratio of 1.10 on October 30, indicating balanced demand between puts and calls. options.
How confident are Bitcoin options traders?
To assess whether options investors have become more confident as the price of Bitcoin remained above $34,000 on October 30, one must analyze the delta bias of Bitcoin options. When traders anticipate a drop in Bitcoin price, the 25% delta bias tends to rise above 7%, while periods of enthusiasm typically see it fall below negative 7%.
Bitcoin options 25% delta bias shifted to a neutral position on October 24 after residing in bullish territory for five consecutive days. However, when investors realized that the $33,500 support level proved more resistant than expected, their confidence improved on October 27, causing the bias indicator to re-enter the bullish zone below. of the negative 7%.
Related: Bitcoin's bull run may not be over yet – here are 3 reasons why
Outstanding Option Premiums and Continued Optimism
Two notable observations emerge from these data. Bitcoin bulls using options contracts before the 17% rally that began on October 23 were paying the highest premium relative to puts in more than 12 months. A negative bias of 18% is very rare and signifies extreme confidence or optimism, likely driven by expectations of the Bitcoin spot ETF.
However, what stands out most is the current negative bias of 13% after the price of Bitcoin increased by 26.7% in the 15 days leading up to October 27. Normally, investors would look for protection options to cover some of their gains, but this was not the case. occur. Consequently, even if the initial call option demand was primarily driven by ETF expectations, the prevailing optimism has endured as Bitcoin soared above $34,000.
Bitcoin (btc) options volumes saw a significant increase on October 23 and 24, marking the highest level in over six months. This activity coincided with a notable 17% rally in the price of BTC over two days. Traders are now wondering if the increase in activity in the BTC options market can be attributed solely to the anticipation of a Bitcoin spot exchange-traded fund (ETF) or whether optimism has waned following the recent price surge above $34,000.
This article does not contain investment advice or recommendations. Every investment and trading move involves risks, and readers should conduct their own research when making a decision.
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