The U.S. Securities and Exchange Commission (SEC) recently approved the listing of physically settled options for BlackRock’s spot Bitcoin ETF, the iShares Bitcoin Trust (IBIT).
This approval is seen as a big deal for the crypto market. But there’s a problem.
The Options Clearing Corporation (OCC) and the Commodity Futures Trading Commission (CFTC) still need to give their green light before these options can hit the market.
Some believe it could bring more stability, while others are afraid of potential volatility spikes.
According to Bitwise Asset Management, the IBIT options could lead to a gamma squeeze, causing Bitcoin’s price to shoot up rapidly. This could mimic the kind of frenzy we saw with GameStop (GME) back in 2021.
A gamma squeeze happens when market dynamics force traders to buy more of an asset. It’s driven by how options work.
Options give traders the right, but not the obligation, to buy or sell an asset at a set price before a certain date.
A call option is a bullish bet, while a put option is bearish. Gamma measures how much the price of an option changes for every $1 in the underlying asset.
If investors buy a lot of call options, market makers (the ones who make sure there’s always someone to take the other side of a trade) end up short on calls.
They need to buy the underlying asset as the price rises to hedge their positions. This buying pushes the price up even more, creating a loop where the price keeps rising as they keep buying.
This is exactly what happened with GameStop. Jeff Park from Bitwise Asset Management thinks:
“Bitcoin options have negative vanna: as spot goes up, so does volatility, meaning delta increases even faster. When dealers [market makers] who are short gamma hedge this (gamma squeeze), Bitcoin’s case becomes explosively recursive. More upside leads to even more upside as dealers are forced to keep buying at higher prices. A negative vanna gamma squeeze acts like a refueling rocket.”
BlackRock’s IBIT options would offer regulated leverage on a supply-constrained asset, which is Bitcoin. This is expected to draw a lot of institutional demand.
Institutions have been historically skeptical about Bitcoin because of risks like “jump-to-default” (JTD). This is the risk that a counterparty might default suddenly, leaving everyone exposed.
Park believes IBIT options will ease this concern, making it easier for institutions to get involved in. He expects a lot of demand for longer-duration, out-of-the-money call options.
“With Bitcoin options, investors can now make duration-based portfolio allocation bets, especially for long-term horizons. There’s a good chance that owning long-dated OTM calls as premium spend will give investors more bang for their buck than a fully-collateralized position that could drop by 80% over the same period.”
This means that instead of buying and holding Bitcoin, the institutions will prefer these call options. It allows them to bet on a massive price rise without tying up too much capital.
And since Bitcoin’s supply is capped at 21 million, any demand spike could have a much bigger effect on price than in a traditional asset.
