Bitcoin The market has been stuck in a rut for more than a month, and investors looking for yield may be partly to blame.
Since mid-February, BTC has been trading in a range centered around $70,000. Some observers say countervailing forces are at play. Safe-haven demand sparked by the war in Iran has supported BTC around $65,000, while rising U.S. Treasury yields have held back significant gains beyond $75,000.
But another factor appears to have quietly kept Bitcoin stuck in its range, and it has to do with investors using call options to generate additional yield on top of their spot market holdings.
“Throughout the first quarter, institutional participants systematically crushed calls for higher strike prices to reap premiums in a down/sideways market. This activity transferred significant gamma exposure to dealers, who hedged by buying on dips and selling on rallies to maintain delta neutrality,” James Harris, CEO of Tesseract, the MiCA-licensed multi-strategy digital asset manager.
Options are derivative contracts that give you the right to buy or sell the underlying asset, in this case BTC, at a predefined price at a future date. A call option gives the right to buy and represents a bull market bet. A put option provides protection against BTC price declines.
Think of it like booking a concert ticket today for a small fee. You can buy it later at the reserved price, even if the ticket increases, or sell your reservation to someone else to make a profit. The ticket seller, for his part, keeps the small amount.
This is essentially what marketers do: they have become the sellers of tickets. By selling call options, they collect premiums (fees) while covering the call buyer during possible BTC price increases. And they do it against their existing bitcoin holdings. This is called the covered call strategy, a way to generate additional yield on top of cash holdings.
Now you may be wondering: what does this have to do with Bitcoin’s range game? The answer lies in knowing that traders shorted or sold these calls to market makers – the firms that take the other side of these options trades.
By selling these calls, traders left market makers with a position called positive gamma, which essentially means that market makers are forced to buy BTC when prices fall and sell BTC when prices rise to remain covered. The result? A price action limited to a range.
In other words, investors’ search for yield indirectly influenced capital flows in the market in ways that limited price fluctuations.
This also explains the decline in bitcoin’s 30-day implied volatility index, BVIV, which contrasts with increases in similar indexes linked to stocks, bonds and oil. BVIV fell 5% to 56% this month.
“The effect was a mechanical suppression of realized volatility – the DVOL index compressed by around six points this week despite the macroeconomic backdrop,” Harris said.
