Bitcoin has spent virtually all of December locked between $85,000 and $90,000, while U.S. equities rallied and gold hit all-time highs. That’s left bitcoin investors frustrated, and the explanation lies in derivatives mechanics.
Now, those same mechanics indicate that the largest cryptocurrency could be making a break toward the high end of the range. The more likely outcome after expiry is an upside resolution toward the mid $90,000s rather than a sustained break below $85,000.
The key driver has been a heavy concentration of options around current prices. Options are contracts that give traders the right, but not the obligation, to buy or sell bitcoin at a set price. Call option holders benefit if price rises, while put options benefit if price falls.
On the other side of these trades are the options writers, who have to honor the contracts if the holders choose to exercise them. They hedge their risk dynamically in the spot and futures markets, and that behavior is controlled by what’s known as gamma and delta.
Delta measures how much an option’s value changes for a $1 move in the bitcoin price. Gamma measures how quickly that delta changes as price moves. When gamma is high and close to spot, dealers are forced to buy and sell frequently, suppressing volatility.
According to X account, David, in December, large put gamma near $85,000 acted as a floor, forcing dealers to buy bitcoin as the price dips. At the same time, heavy call gamma near $90,000 capped rallies, with dealers selling into strength. This created a self-reinforcing range driven by hedging necessity rather than conviction.
With $27 billion of options approaching expiry on Dec. 26, this stabilizing effect weakens as gamma and delta decay.
This expiry is extremely large and has a bullish tint towards it. More than half of Deribit open interest rolls off, with a put-call ratio of just 0.38 (that is, there are almost three times as many call options as puts) and most open interest concentrated in upside strike prices between $100,000 and $116,000.
The max pain point, which refers to the price level at which options buyers would lose the most money at expiry and the sellers, typically dealers, would make the most, is at $96,000, which reinforces the upside skew.
In addition, implied volatility measures the market’s expectation of how much bitcoin’s price may fluctuate in the future, and the Bitcoin Volmex implied volatility index hovering near one month lows around 45 suggests traders are not pricing in elevated near-term risk.
