A Gamma Squeeze Unlike Anything Wall Street Has Seen
How Bitcoin ETF Options Could Drive Explosive Moves
The Bitcoin market is buzzing with excitement over the introduction of ETF options, a development that could usher in a new era of price dynamics. As institutions and retail investors flock to these options, the potential for a gamma squeeze—a phenomenon where rapid price increases are driven by feedback loops in hedging activity—is becoming a hot topic among investors and analysts. With Bitcoin's unique market structure, fixed supply, and growing institutional interest, are we on the verge of witnessing unprecedented price movements?
Unlocking the Potential of Bitcoin ETF Options: Insights from Jeff Park
In a recent episode of On the Margin, Jeff Park, Head of Alpha Strategies at Bitwise, explored the transformative impact of Bitcoin ETF options on the market. These instruments offer a novel way for investors to capitalize on volatility and long-term growth, while introducing mechanisms that could redefine Bitcoin’s price behavior.
Park emphasized that volatility in the Bitcoin market is multi-dimensional. Unlike traditional assets, where volatility tends to stabilize as prices rise, Bitcoin's volatility behaves differently. With the introduction of spot Bitcoin ETF options, investors now have the ability to express "path dependency"—the trajectory of price movements, rather than just the endpoints—through advanced trading strategies.
Day One Insights: What IBIT Trading Revealed
On November 19, 2024, the first full day of trading for BlackRock’s Bitcoin ETF ($IBIT), the market revealed telling patterns:
Unstable Correlation Between Spot and Implied Volatility: Bitcoin exhibited sharp local peaks and troughs before trending downward. This dynamic highlighted the evolving relationship between the spot market and implied volatility, showcasing how ETF options may amplify these swings.
Bullish Sentiment Among Retail and Institutional Investors: The put-call ratio—a key sentiment indicator—was heavily skewed toward calls, particularly for contracts expiring as far out as 2027. This suggests strong optimism, despite some analysts’ predictions that options would primarily hedge downside risks.
Leverage as a Driver: Park observed that institutional and retail investors are already allocating 1-3% of their portfolios to Bitcoin, recognizing its asymmetric risk-reward profile. “Clients are comfortable with a small allocation because if Bitcoin goes to zero, it won’t significantly impact their portfolio. But if it goes up 10x, it will make a meaningful difference,” Park explained. This mindset mirrors the very essence of a call option, which provides limited downside with significant upside potential. As a result, it’s no surprise that these investors are likely to skew toward leveraging derivatives like ETF call options to further amplify their exposure.
Gamma Squeeze Mechanics: What It Could Mean for Bitcoin
A gamma squeeze occurs when options sellers, particularly those short on calls, are forced to hedge their positions as the underlying asset's price rises. This hedging activity involves buying more of the asset, creating a self-reinforcing cycle of upward price momentum. For Bitcoin, this dynamic is amplified by its negative vanna—a phenomenon where rising spot prices increase volatility, further accelerating delta shifts.
Unlike traditional stocks, Bitcoin’s fixed supply makes it immune to dilution, setting it apart from past gamma squeeze cases like GameStop (GME). For example, GameStop issued new shares aka diluted shares, which helped stabilize the price and eventually ended the extreme price surge caused by the squeeze. Jeff Park observed that a similar Gamma Squeeze in Bitcoin would create an unprecedented scenario: “We haven’t seen anything like this before in history, so we don’t know exactly how it will play out.”
ETF options have added a second layer of reflexivity to Bitcoin’s price behavior. As institutions selling these options hedge their exposure, the risk of gamma squeezes grows. Park described this reflexivity as a "refueling rocket," where more upside leads to even more buying, amplifying price movements.
While the immediate introduction of options could heighten volatility, long-term institutional participation may have a stabilizing effect. Analysts like Greg Magadini of Amberdata argue that portfolio managers' quarterly rebalancing—trimming exposure during rallies—could dampen extreme price swings over time.
Investors looking to monitor a possible gamma squeeze should focus on:
Open Interest: High open interest in call options can indicate potential stress points where hedging activity may escalate. Specifically, OTM call options, especially near key strike prices, could help signal where hedging may occur. Look for clustering of open interest at strike prices just above the current spot price. These strikes will become “in the money” if Bitcoin’s price rises, forcing makers to buy the underlying asset to hedge their exposure.
Contract Distribution: Heavily concentrated near-term expirations (weekly or monthly) can create more immediate gamma hedging pressure. On the other hand, LEAPs with high call open interest normally don’t trigger an immediate squeeze although still indicates bullish sentiment. As new ETF’s such as Grayscale’s planned Bitcoin Covered Call ETF, enter the market, they could help mitigate upward price pressure created by increased call buying activity. This is an example of how many factors will be at play in the coming months.
Margin Models: Current models favor long volatility positions, potentially amplifying momentum-driven events. A broken margining system, as noted by Jeff Park, skews risk-taking toward upside volatility, further increasing the likelihood of dramatic price movements like a gamma squeeze.
Estimating the Potential Range of a Bitcoin Gamma Squeeze
Based on historical gamma squeeze examples and Bitcoin’s unique market dynamics, we can attempt to gauge the possible price increase Bitcoin could experience during a gamma squeeze. Bitcoin’s current price is approximately $97,000, and its fixed supply, high volatility, and strong institutional interest create a setup for significant price moves.
Analyzing Historical Gamma Squeezes
AMC Entertainment:
Price surged from $2 to $62, a 3,000% increase at its peak.
Factors: Massive retail buying and call option activity, amplified by market makers’ hedging.
GameStop:
Price skyrocketed from below $20 to $340, a 1,600% increase during its squeeze.
Factors: A combination of short and gamma squeezes driven by high retail activity and limited liquidity.
SoftBank Tech Stock Squeeze:
Stocks like Tesla rallied 74% in a single month and Apple gained 21%, with outsized movements driven by institutional call-buying activity.
Potential Price Increase for Bitcoin
Given the above factors and historical gamma squeeze scenarios, Bitcoin could experience price increases in the following ranges:
Conservative Estimate (20%-50% Increase):
Similar to Apple’s 21% rise during the SoftBank squeeze, this range would place Bitcoin’s price at $116,400 to $145,500.
This is plausible if institutional participation is strong but not yet overwhelming.
Moderate Estimate (100%-200% Increase):
Comparable to GameStop’s 1,600% rise but adjusted for Bitcoin’s larger market cap, this range could bring Bitcoin to $194,000 to $291,000.
This assumes substantial options activity with a strong gamma squeeze effect but not a parabolic retail influx.
Aggressive Estimate (300%-500% Increase):
Echoing AMC’s 3,000% rise, Bitcoin could theoretically hit $388,000 to $582,000.
This would require a perfect storm of institutional buying, retail momentum, and market makers being forced to hedge aggressively in an already supply-constrained market.
The Reflexivity of Bitcoin: Why It Matters
George Soros’ concept of reflexivity—the feedback loop between perception and reality—is at the heart of Bitcoin’s price behavior. Bitcoin exemplifies reflexivity because of its finite supply. As its price rises, it attracts more attention and investment, driving prices higher in a self-reinforcing loop.
Mehdi Lebbar, co-founder of Exponential.fi, coined the term "reflexivity squared" to describe how Bitcoin ETF options magnify this dynamic. As options trading adds liquidity and leverage, the potential for unprecedented price movements becomes more real.
Final Thoughts: Is a Gamma Squeeze Coming?
The launch of Bitcoin ETF options has introduced a new dimension to the market, with the potential for gamma squeezes making headlines. While the immediate outlook suggests heightened volatility, the long-term implications could be transformative. Whether through long-dated calls, selling puts, or outright holding the underlying asset, Bitcoin bulls have a range of strategies to now go long than just playing MSTR options for example.
As Jeff Park and Mehdi Lebbar point out, the interplay between Bitcoin’s scarcity and the new options market could lead to dramatic price discovery events. While the exact impact remains uncertain, one thing is clear: Bitcoin’s role in financial markets is entering an unprecedented era that Wall Street hasn’t witnessed before.
References:
https://www.coinspeaker.com/options-blackrock-bitcoin-etf-gamestop-like-rally/
https://www.etf.com/sections/news/sec-approves-options-trading-multiple-bitcoin-etfs
https://cryptonews.net/news/bitcoin/29823954/
Disclosure:
Please note that nothing in this blog should be interpreted as financial advice or a suggestion to buy, sell, or hold any specific asset. I do not hold any degrees or certifications in finance, and all views expressed here are my personal opinions. Every investor’s situation is unique, and decisions should be made based on your own financial goals and risk tolerance. Always do your own research or consult with a certified financial professional before making any investment decisions.