bitcoin It has spent virtually all of December stuck between $85,000 and $90,000, while US stocks rose and gold hit all-time highs. This has left bitcoin investors frustrated, and the explanation lies in the mechanics of derivatives.
Now, those same mechanisms indicate that the largest cryptocurrency could be breaking towards the upper end of the range. The most likely outcome after expiration is a bullish resolution towards the mid-$90,000s rather than a sustained break below $85,000.
The key factor has been a strong concentration of options around current prices. Options are contracts that give traders the right, but not the obligation, to buy or sell bitcoins at a certain price. Holders of call options profit if the price rises, while put options profit if the price falls.
On the other side of these operations are option writers, who have to honor the contracts if holders decide to exercise them. They hedge their risk dynamically in the spot and futures markets, and that behavior is controlled by what is known as gamma and delta.
Delta measures how much the value of an option changes for a $1 move in the price of bitcoin. Gamma measures how quickly that delta changes as the price moves. When gamma is high and close to spot, traders are forced to buy and sell frequently, suppressing volatility.
According to X Account, David, in December, a large options range near $85,000 acted as a floor, forcing traders to buy bitcoin as the price dropped. At the same time, an intense buying options range near $90,000 limited rallies, and traders sold hard. This created a self-reinforcing range driven by the need to hedge rather than conviction.
With $27 billion in options set to expire on December 26, this stabilizing effect weakens as gamma and delta decay.
This expiration is extremely large and bears a bullish tinge. More than half of Deribit’s open interest is down, 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 rising 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 brokers, would profit the most, is at $96,000, reinforcing the bullish bias.
Additionally, implied volatility measures the market’s expectation of how much the price of bitcoin may fluctuate in the future, and the Bitcoin Volmex Implied Volatility Index hovering around one-month lows around 45 suggests that traders are not pricing in high short-term risk.
