Options Data Points to Potential Bitcoin Surge Beyond $36K

Market dynamics suggest that Bitcoin's journey beyond the $36,000 mark could lead to swift and substantial gains, thanks to the recent actions of options market makers.

In the realm of cryptocurrency, options serve as derivative contracts, providing the holder with the right, but not the obligation, to buy or sell the underlying asset at a predetermined price on a future date. A bullish bet, known as a call, grants the right to buy, while a put provides the right to sell.

As Bitcoin surged nearly 27% in the last four weeks, there has been a notable uptick in demand for call options with higher strike prices. This surge has left market makers with a considerable net short gamma exposure above the $36,000 threshold. Gamma, in options trading, signifies the rate at which delta (the sensitivity of options prices to changes in Bitcoin's price) will alter with a $1 shift in Bitcoin's value.

When market makers find themselves in a net short gamma position, they acquire the underlying asset in the spot market as its value rises. This action aligns with their responsibility to uphold an overall delta or market-neutral exposure. This hedging activity often propels a rapid price surge, a phenomenon known as a "gamma squeeze." It is believed to have played a role in Bitcoin's recent surge from $30,000 to $35,000.

Alex Thorn, head of firmwide research at Galaxy Digital, commented on this potential development, stating, "If BTCUSD moves higher to $35,750-$36,000, options dealers will need to buy $20 million in spot BTC for every 1% upside move, which could cause explosiveness if we begin to move up towards those levels."

the #bitcoin gamma squeeze from last week could happen again ????

if BTCUSD moves higher to $35,750-36k, options dealers will need to buy $20m in spot BTC for every 1% upside move, which could cause explosiveness if we begin to move up towards those levels

more ???? pic.twitter.com/OA9tJ0ZaK9

— Alex Thorn (@intangiblecoins) October 30, 2023

Dealers or market makers, integral to maintaining order book liquidity, consistently stand on the opposing side of investors' trades. They generate revenue through the bid-ask spread and diligently work to sustain a directionally neutral portfolio.

The present stance of market makers, juxtaposed with its anticipated impact on the spot price, marks a departure from earlier this year when market makers held a net long gamma position. At that time, they engaged in buying low and selling high in the spot/futures market to uphold portfolio neutrality, further contributing to the prevailing market stability.

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