Bitcoin spent virtually all of December stuck between $85,000 and $90,000 as U.S. stocks rallied and gold hit all-time highs. This has frustrated Bitcoin investors, and the explanation lies in the mechanics of derivatives.
Now, these same mechanisms indicate that the largest cryptocurrency could make a breakthrough to the high end. The most likely outcome after expiration is an upward resolution towards the mid-$90,000s rather than a sustained break below $85,000.
The key factor has been a high concentration of options around current prices. Options are contracts that give traders the right, but not the obligation, to buy or sell bitcoin at a fixed price. Holders of call options benefit if the price rises, while put options benefit if the price falls.
On the other side of these trades are the options sellers, who must honor the contracts if the holders choose to exercise them. They hedge their risk dynamically in the spot and futures markets, and this behavior is controlled by so-called gamma and delta.
Delta measures how much an option’s value changes for a $1 change in the price of Bitcoin. Gamma measures how quickly this delta changes as prices move. When gamma is high and close to spot, traders are forced to buy and sell frequently, thereby suppressing volatility.
According to account At the same time, big gamma calls near $90,000 capped the rallies, with dealers selling in force. This created a self-reinforcing range driven by the need to hedge rather than conviction.
As $27 billion of options approach their December 26 expiration, this stabilizing effect weakens as gamma and delta decrease.
This expiration is extremely long and has a bullish tone. More than half of the open interest on Deribit is canceled, with a put-call ratio of just 0.38 (i.e. there are almost three times as many calls as puts) and most of the open interest is concentrated in upside strike prices between $100,000 and $116,000.
The maximum pain point, which refers to the price level at which option buyers would lose the most money at expiration and sellers, usually dealers, would gain the most, is $96,000, reinforcing the bullish bias.
Additionally, implied volatility measures the market’s expectations of future Bitcoin price fluctuation, and the Volmex Bitcoin Implied Volatility Index, near one-month lows around 45, suggests that traders are not pricing in high short-term risk.
