Bitcoin options information highlights traders’ confidence in the value of BTC
Bitcoin (BTC) options volumes experienced a spike on October 23 and October 24, marking the highest level in six months. This activity is an amazing 17% BTC price rally in two days. Traders are now pondering whether the uptick in activity in the BTC options market could be due to pending Bitcoin exchange-traded fund (ETF) positions, or whether optimism is waning following the recent rally above $34,000.
Considering Bitcoin's impressive 108% year-to-date performance, 2023's recent gains are a rare sight. Notably, the last example of this type of price action was on March 14, when Bitcoin rose from $20,750 to $26,000 in two days, representing a 25.2% price increase.
It is worth noting that an astonishing 208,000 contracts changed hands in two days. To put this in perspective, the previous peak on August 18 saw a total of 132,000 contracts traded, but that was during a 10.7% drop in Bitcoin's price from $29,090 to $25,980 in two days. Interestingly, Bitcoin options open interest, which measures contracts outstanding for each expiration, hit a more than 12-month high on Oct. 26.
This increase in activity has led some analysts to emphasize the threat of a “gamma squeeze.”
The #bitcoin gamma squeeze from last week could happen again.
If BTCUSD moves higher to $35,750-$36k, options traders will need to buy $20 million in spot BTC for every 1% upside move, which could lead to an explosion if we start going to those levels.
More pic.twitter.com/OA9tJ0ZaK9
— Alex Thorn (@intangiblecoins) October 30, 2023
According to estimates by Galaxy Research and Amberdata, BTC options market makers may have to cover $40 million for every 2% positive movement in Bitcoin's spot price. While this number sounds significant, it pales in comparison to Bitcoin's daily adjusted volume of $7.8 billion.
Another consideration when evaluating Bitcoin options volume and total open interest is whether these instruments are primarily used for hedging purposes or neutral-to-energy strategies. To resolve this dilemma, the difference in demand between calls (buying) and puts (selling) should be closely monitored.
In particular, the period from October 16 to October 26 was dominated by neutral-to-bullish call options, with the ratio consistently remaining below 1. Thus, the excess volume seen on October 23 and 24 was skewed toward call options.
However, the landscape changed as investors looked for defensive options, with interest peaking at 68% on October 28. More recently, the ratio moved to a neutral 1.10 ratio on October 30, indicating balanced interest between puts and calls. Options.
How confident are Bitcoin option traders?
One should analyze the delta skew of Bitcoin options to gauge whether options investors have developed confidence since the price of Bitcoin held above $34,000 on October 30. When traders anticipate a decline in the price of Bitcoin, the delta 25% skew rises above 7%, while bullish periods fall below negative 7%.
Bitcoin options 25% delta skew turned into a neutral position on October 24th after living in the bullish territory for five consecutive days. However, when investors realized that the $33,500 support level was more resilient than expected, the On October 27, their confidence improved, causing the skewness indicator to enter the bullish zone below negative 7%.
Related: Bitcoin's Bull Movement May Not Be Over – Here's 3 Reasons Why
Uncommon options premium and continued optimism
Two interesting observations emerge from this data. Before the 17% rally that began on October 23, bitcoin bulls using options contracts were paying the relative highs to put options over 12 months. A negative 18% volatility is very unusual and indicates high confidence or optimism.
Most notable, however, is the 13% negative swing after Bitcoin's price surged 26.7% in the 15 days to October 27. Normally, investors look for protective deposits to protect some of their interests, but this is not the case. They happen. So, although the initial demand for call options was primarily ETF expectations, the bullishness of Bitcoin's rise above $34,000 remained strong.
This article does not contain investment advice or recommendations. Every investment and business activity involves risk, and readers should do their own research when making a decision.