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IBIT Options And Insatiable Corporate Demand: A Historic Squeeze Is Coming To Bitcoin

Summary The launch of options on IBIT on 19 November 2024 marks Bitcoin`s solidification as a legitimate asset class. A gamma vanna squeeze, a highly reflexive process induced by options and dynamic hedging, could materialize over an absolutely scarce asset. The growing adoption of BTC as a treasury asset is another catalyst which will at the very least set a price floor. It is likely to trigger a supply shock. All of this points to the possibility of a squeeze unlike anything financial markets have ever seen. For those who didn’t know, 19 November 2024 was a historic day because it was when options on a Bitcoin spot ETF first started trading. This is a monumental moment for Bitcoin (BTC-USD) as it solidifies BTC as a legitimate asset class complete with ETF wrappers, futures, and now options. When the SEC first greenlighted options on the iShares Bitcoin Trust ETF (IBIT), I wrote an article going very deep into the impacts of this development. You can read that here . On 19 November, IBIT options went live with just 6 expiries. The tick size seems to be $0.05, which is a bit large for an underlying that is $55 per share. The bid ask spreads were okay for now, and they will likely get narrower over time. The first 60 minutes saw 73,000 contracts traded , and I’m happy to say that I was part of this group. My first move was to buy calls as far OTM as possible, at the highest DTE possible. This meant the 100 strike calls expiring in January 2027. I opened this position for $14.70 (with the 100X multiplier and commissions the total debit was $1471.13). My breakeven is that IBIT must be at $114.71 per share by January 2027. This would translate to a BTC price of ~$200,183. On 21 November, weekly options were launched. This gives traders even more opportunity to make very specified bets. In my deep dive article about IBIT options , I talked about the potential for an option-induced squeeze unlike anything markets have ever seen. This was the core logic behind the trade. In my view, the real risk of BTC is perpetually to the upside. A long position in an OTM call option expiring in 2 years is the insurance plan for such an event. In my article, I wrote: So the possibility of a truly enormous and sudden gamma squeeze rally now exists if IBIT options are listed. Moreover, the possibility that this rally will outlive those of other assets also exists thanks to BTC’s absolute scarcity. This is now a factor which should be rationally priced into BTC’s valuation model. What is the new expected value of the price of BTC now that this is a possibility? Because the probabilities are positive, the extra boost in expected value must be positive as well. This constitutes a sustained increase under a rational expectations model for valuing BTC. To learn more about the nuances of gamma squeezes, please read the section titled “Impact 4: Unprecedented Upside Market Reflexivity Thanks To BTC`s Absolute Scarcity And Option Greek Dynamics.” Now, there is another dynamic which I did not mention in that article, which I will explain here. Upside Skews And Vanna Squeeze You see, BTC’s historical returns exhibit significant skew to the upside. BTC option markets (BTC options have existed for a long time on Deribit) have usually priced this in. OTM calls tend to have higher IV than OTM puts, which is very different from equities markets, where OTM puts are more expensive than OTM calls. This can also be observed in the US options markets of BTC proxies like MSTR. There is another unique property BTC (and BTC proxies like MSTR) exhibits. As BTC goes up, its implied volatility increases too. This is quite different from equity indices: VIX tends to fall as the SPX rises. Now, to be clear, BTC IV also rises when BTC crashes. So really, BTC’s return distribution (both historical and implied) exhibits some kurtosis (tails are fat). Bitcoin Volatility Index (Deribit) When you put all this together, it is yet another catalyst for explosive option-induced upside potentially unlike anything we’ve ever seen. Option market makers try to stay delta neutral, which means they will buy or sell the underlying in a quantity that cancels out the delta on their books. If they sold some calls and their total delta is -101, then they will buy 101 shares of the underlying to get to delta neutral. The options-induced squeezes occur when delta changes due to various circumstances. While gamma is the most well-known way of changing delta (this is what gives the name “gamma squeeze”), when it comes to BTC, there is another potentially more potent factor called vanna. Vanna is the cross partial derivative of an option’s value with respect to changes in the spot price and the implied volatility of the underlying. Those of you who are mathematically inclined will know that this means vanna is the derivative of delta with respect to changes in implied volatility. It can also be said that vanna is the derivative of vega with respect to changes in the underlying price. Both statements are true due to how partial derivatives work, but pay attention to the former statement. Vanna is positive for OTM BTC calls. This means that as implied volatility increases, vanna causes delta to increase too. So this is another factor which will change delta and force market makers to make more spot trades to get to delta neutral. Recall that unlike equity indices, BTC IV rises as BTC rises. BTC rising contributes to a gamma squeeze situation . BTC IV rising simultaneously will contribute to a vanna squeeze situation. This is what would happen in a vanna squeeze: IBIT surges up and IBIT IV increases Vanna causes the delta on OTM IBIT calls to increase because IV is increasing. Market makers now deal with higher delta on OTM calls, so they have to buy more IBIT. This makes IBIT surge higher, which increases IBIT IV. This would happen along with a gamma squeeze, which looks like this: IBIT surges higher. Gamma causes the delta on OTM IBIT calls to increase because the underlying is moving higher. Market makers now deal with higher delta (on top of the vanna-induced higher deltas), so they have to buy more IBIT. This makes IBIT go higher. (Please note that in both of these situations, when I say, “market makers deal with higher delta,” I mean the magnitude of their delta exposure is higher. Technically, they are dealing with lower delta on their short calls since delta on short calls is negative.) Both vanna and gamma squeezes would happen simultaneously. Equity melt-ups rarely occur, partly because IV falls as the underlying increases. This makes vanna work against gamma, and it offsets how much market makers need to buy. BTC doesn’t have this problem. Corporations Are Creating An Immense Supply Shock With Their Bitcoin Purchases Here`s something else to consider. There are now more companies running a BTC treasury thanks to MicroStrategy (MSTR). Business adoption of BTC reserves has grown by 30% over the last year, according to River. This is a very US-focused study, and it includes private businesses too. The economic energy of more entities buying BTC will surely set a price floor and increase the odds of a squeeze unfolding. MicroStrategy announced a plan on 30 October to buy $42 billion in BTC over the next 3 years . This included the biggest at-the-market filing in the history of capital markets: authorization to issue $21 billion in common stock. In just 3 weeks, MicroStrategy has already used over $6 billion of the $21 billion. $4.6 billion was announced on 18 November . And $2.03 billion was announced on 11 November . These were all used to purchase BTC, and it was likely a major demand catalyst that pushed the price from the upper 70,000s to the 90,000s. They also announced a $3 billion offering of convertible notes on 21 November. This will be used to buy BTC too. MicroStrategy announced $42 billion to be raised over 3 years. In just 3 weeks, they have raised nearly $10 billion of that $42 billion. Anyone who is paying attention should, in my opinion, be alarmed at the rate of capital moving into BTC via MicroStrategy alone. The key point is that MicroStrategy is not alone. On 21 November, MARA ( MARA ) announced a $1 billion convertible notes offering , upsized from an initial $700 million , which was proposed on 18 November. Please pay attention to the rate at which these capital flows are moving. Semler Scientific ( SMLR ) is also continuing to use their ATM to buy more BTC, here they announced a $21.5 million raise on 18 November . Also, two more public companies have announced that they will be adopting a BTC treasury. Solidion Technology announced it on 14 November , with a “Commitment of Future Capital Raises to Acquire Additional Bitcoin.” And Genius Group announced it on 12 November . In the cases of Solidion Technology (STI) and Genius Group ( GNS ), their stocks both soared after their announcements. Even the Board of Microsoft (MSFT) will be having a meeting to consider adopting a BTC treasury and the shareholders will vote on this issue. Though the Board is advising against a BTC treasury, the very fact that this is being brought up by shareholders, and that there will be a vote, is proof that Bitcoin is gaining significant attention. It is becoming increasingly hard to ignore Bitcoin’s role in corporate finance. At this point, most public companies are probably aware of Bitcoin as an option, though they are hesitant for various reasons. While I cannot be sure of this, I’m betting that there are such deals in the private equity and debt markets too. The largest sizes might not be close to MicroStrategy’s or MARA’s offerings, but the total magnitude could still be enormous, given a long tail of smaller companies which buy BTC. After all, BTC adoption has been a trend for both public and private companies. The picture I’m trying to paint here is that Bitcoin adoption is rapidly accelerating, and this is taking the form of corporations piling into BTC and even raising money to buy BTC. The least impactful result of this is that it sets a very strong price floor for BTC and IBIT. The more likely result is that the BTC market will get cornered and pushed much higher due to a massive supply shock. With the new IBIT options market opening the door to highly reflexive gamma vanna squeezes, the chance of a massive rally in IBIT and BTC seems higher than ever before. Conclusion I believe a gamma vanna squeeze unlike anything we’ve ever witnessed could be coming to BTC now that IBIT options are live. The combination of BTC’s volatility and price dynamics with the fact that it is absolutely scarce creates a powder keg of explosive potential. The case is even stronger when you consider the coming wave of corporations which have or will adopt Bitcoin. Even if you don’t think BTC has any value, you should still consider the favorable economics behind it. CoinOtag