bitcoin The market has been stagnant for more than a month, and investors seeking returns may be partly to blame.
Since mid-February, BTC has traded in a range centered around $70,000. Some observers say opposing forces have been at play. Safe haven demand fueled by the Iran war has been supporting BTC around $65,000, while rising US Treasury yields have been capping big gains above $75,000.
But another factor appears to have quietly kept Bitcoin trapped in its range, and it is linked to investors using call options to generate additional yield on top of their spot market holdings.
“Throughout the first quarter, institutional participants have been systematically overwriting calls at higher strikes to reap premiums in a bear/sideways market. That activity transferred significant gamma exposure to traders, who have been hedging 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 pre-set price at a later date. A call option gives the right to buy and represents a bull market bet. A put option offers protection against price drops in BTC.
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 goes up, or sell your reservation to someone else for a profit. Meanwhile, the ticket seller keeps the small fee.
That’s essentially what traders have been doing: they have become ticket sellers. By selling call options, they collect premiums (the fee) and at the same time cover the call buyer on potential BTC price increases. And they do so against their existing bitcoin holdings. This is called a covered call strategy, a way to generate additional return on top of spot holdings.
Now you might be wondering: what does this have to do with bitcoin play range? The answer lies in knowing that traders have been shorting or selling these calls to market makers (the firms that take the other side of these options trades).
By selling these calls, traders have left market makers with a so-called positive gamma position, which essentially means that market makers are forced to buy BTC when prices fall and sell BTC when prices rise to stay covered. The result? A price action within a range.
In other words, investors’ pursuit of yields has been indirectly influencing capital inflows into the market in ways that limit price swings.
This also explains the drop in bitcoin’s 30-day implied volatility index, BVIV, which contrasts with spikes in similar indices linked to stocks, bonds and oil. BVIV has declined between 5% and 56% this month.
“The effect has been a mechanical suppression of observed volatility: the DVOL index has compressed approximately six points this week despite the macroeconomic backdrop,” Harris said.
