BlackRocks Bitcoin ETF Options Spark Gamma Squeeze Similar to GME

CoinWorld reported:
The U.S. Securities and Exchange Commission (SEC) has recently approved the listing of physical settlement options for BlackRock’s spot Bitcoin ETF, iShares Bitcoin Trust (IBIT).
This approval is seen as a significant event in the cryptocurrency market. However, there is one issue:
The Options Clearing Corporation (OCC) and the Commodity Futures Trading Commission (CFTC) still need to give the green light before these options can be listed.
Some believe this could lead to greater stability, while others are concerned about potential surges in volatility.
According to Bitwise Asset Management, IBIT options could lead to gamma squeezes, causing Bitcoin prices to rise rapidly.
This could mimic the frenzy seen with GameStop (GME) in 2021.
Gamma squeezes occur when market dynamics force traders to buy more assets. This is contingent on how options work;
Options grant traders the right, but not the obligation, to buy or sell an asset at a fixed price before a specific date.
Call options are bullish bets, while put options are bearish. Gamma measures the price change of the underlying asset per $1 change in the option’s price.
If investors buy a large number of call options, market makers (those who ensure that there is always someone on the other side of the trade) will ultimately short the call options.
As prices rise, they need to buy the underlying asset to hedge their positions. This buying further drives up prices, creating a feedback loop in which prices continue to rise as they keep buying.
This is precisely what happened with GameStop. Jeff Park from Bitwise Asset Management believes:
“Bitcoin options exhibit negative vanna: as spot prices rise, volatility also increases, which means the delta grows faster. When short gamma traders (market makers) hedge this (gamma squeeze), the situation for Bitcoin becomes explosively recursive. As traders are forced to continue buying at higher prices, more upswings lead to even more upswings. Negative vanna gamma squeezes are like a rocket fueled with gasoline.”
BlackRock’s IBIT options will provide regulated leverage for the supply-constrained asset Bitcoin. This is expected to attract significant institutional demand.
Due to risks like “default” (JTD), institutions have historically been skeptical of Bitcoin. This pertains to the risk that a counterparty may suddenly default, putting everyone at risk.
Park believes that IBIT options will alleviate this concern, making it easier for institutions to participate. He expects strong demand for longer-dated, out-of-the-money call options.
“With Bitcoin options, investors can now make term-based portfolio allocation bets, especially for long-term investments. Compared to fully collateralized positions that could drop 80% in the same period, holding long-term OTM call options as a premium expenditure is likely to yield greater returns for investors.”
This means that these institutions will prefer these call options over buying and holding Bitcoin. It allows them to bet on significant price increases without tying up too much capital.
Given Bitcoin’s supply cap of 21 million, any surge in demand could have a greater impact on prices than traditional assets