Bitcoin has remained largely stagnant throughout December, fluctuating between $85,000 and $90,000. This period of relative stability comes amid a broader rally in U.S. equities and new all-time highs for gold, leaving many bitcoin investors feeling increasingly frustrated. However, the mechanics of derivatives trading may soon signal a shift, suggesting the possibility of upward movement for the cryptocurrency.
Current market dynamics hint at a favorable scenario for Bitcoin, with indications pointing towards a potential break toward the higher end of its recent range. Analysts suggest that, following the expiration of significant options contracts on December 26, there is a greater likelihood of Bitcoin ascending to the mid $90,000s, as opposed to experiencing a sustained decline below the $85,000 mark.
Central to this analysis is the concentration of options contracts at existing price levels. Call options grant traders the right to purchase Bitcoin at a set price, benefiting if the price rises, while put options allow traders to sell Bitcoin at a predetermined price, benefitting from price declines. The entities that write these options, known as dealers, are required to hedge their positions in both the spot and futures markets. This hedging behavior is largely dictated by gamma and delta, two critical metrics in the options market.
Delta quantifies how the value of an option changes with a $1 fluctuation in Bitcoin’s price, while gamma indicates how quickly that delta changes as the price moves. When gamma levels are high, particularly near the spot price, dealers frequently buy and sell Bitcoin to manage risk, which serves to dampen volatility.
In December, a substantial put gamma situated around $85,000 has acted as a supportive floor, compelling dealers to buy Bitcoin whenever its price dips. Conversely, a significant call gamma at around $90,000 has capped potential rallies, leading to a situation where the price remains confined to a narrow range—a phenomenon driven more by hedging requirements than by market conviction.
As the expiration of a massive $27 billion in options approaches, the stabilizing influence associated with high gamma and delta begins to wane. This impending expiration carries a bullish outlook, with more than half of the open interest on the Deribit exchange set to roll off. Notably, the put-call ratio stands at a low 0.38, suggesting that nearly three times as many call options exist compared to puts. Most open interest is also concentrated in higher strike prices ranging from $100,000 to $116,000.
Importantly, the “max pain” point—referring to the price level at which options buyers would incur the most significant losses upon expiry—is established at $96,000, further implying an upward bias in the market. Furthermore, with the Bitcoin Volmex implied volatility index near one-month lows around 45, it appears that traders are not pricing in significant near-term risks, which suggests a potential for price adjustments in the near future.
Overall, as options expiry approaches, the mechanics of derivatives market trading may drive Bitcoin toward its next phase, potentially breaking through the $90,000 threshold as market conditions evolve.
