Options Linked to BlackRock Bitcoin ETF Can Trigger GameStop Like Rally in BTC

As a seasoned crypto investor with over a decade of experience in the financial markets, I have seen my fair share of game-changers and market disruptors. The recent approval for trading options on the BlackRock Bitcoin ETF (IBIT) by the US Securities and Exchange Commission (SEC) has certainly piqued my interest.


Last week, the US Securities and Exchange Commission (SEC) gave the approval for trading physically settled option options on the BlackRock Bitcoin ETF (IBIT). Now, the IBIT options still await approval from the Commodity Futures Trading Commission (CFTC) and the Options Clearing Corporation (OCC).

Nonetheless, market experts anticipate that the release of these new investment vehicles will likely increase institutional interest in cryptocurrencies even more. Bitwise Asset Management hypothesizes that the option market behavior for ETFs might potentially cause a “gamma squeeze” in Bitcoin’s pricing.

In simple terms, options are types of financial contracts that allow someone to either buy or sell a certain asset at a predetermined price by a future date. If you have a call option, it means you have the right but not the obligation to purchase the asset, which suggests a positive or bullish market expectation. On the other hand, if you have a put option, you have the right to sell the asset, implying a negative or bearish outlook. Gamma is a term used to describe how an option’s delta, its reaction to changes in the price of the underlying asset, adjusts for every $1 change in the asset’s price.

Jeff Park, who is in charge of alpha strategies and manages portfolios at Bitwise Asset Management, recently expressed that the BlackRock Bitcoin ETF (IBIT) offers a controlled level of amplification for the limited supply of Bitcoin. He feels this could generate strong institutional interest in call options, potentially resulting in a gamma squeeze scenario. In a communication on platform X, he conveyed:

In simple terms, when the price of Bitcoin rises, so does its volatility. This means that delta, a measure of how much an option changes in response to a change in the underlying asset’s price, increases at an even faster rate. When market makers who have sold options with negative gamma (a measure of how an option’s delta changes in response to a change in volatility) try to hedge this position, it creates a situation known as a ‘gamma squeeze’. This is similar to a self-reinforcing loop for Bitcoin. The more the price goes up, the more it tends to continue rising because market makers are forced to buy Bitcoin at higher prices to offset their losses. A negative vanna gamma squeeze can act like a powerful rocket fueling further increases in Bitcoin’s price.

Why BlackRock Bitcoin ETF Options Will Be Game-Changer?

As a researcher, I too find Park’s assertion compelling: the introduction of IBIT options is indeed poised to revolutionize the landscape. The “jump-to-default (JTD) risk,” a hurdle that has traditionally kept institutional investors at bay, seems destined for removal with this innovation. This shift could potentially propel the synthetic notional exposure to Bitcoin to unprecedented levels. To put it simply, JTD signifies the unexpected default of an issuer or counterparty before the market can adapt to heightened risk.

Additionally, Park expects a significant interest from investors in longer-term, out-of-the-money (higher strike price) call options when introduced. He mentioned:

Investors now have an opportunity to make strategic, timeframe-focused investments in bitcoin through options. This is particularly beneficial for long-term strategies. It’s possible that purchasing out-of-the-money calls with a longer expiration date could yield better returns compared to maintaining a fully-backed position which might lose as much as 80% of its value during the same period.

On the other hand, certain analysts hold an opposing opinion. For instance, Greg Magadini, head of derivatives at Amberdata, predicts a ‘game squeeze’ could ensue, leading to a surge in bullish activity, if Donald Trump regains the presidency this year.

However, he also pointed out that in the long run, institutions investing in ETFs and options on ETFs could potentially reduce price swings. This is because institutional investors often adjust their holdings counter-cyclically. For instance, portfolio managers might decrease their exposure during quarterly rebalancing, selling assets that have appreciated excessively when bitcoin’s value rises too quickly, as explained by Magadini.

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2024-09-23 15:09