Bitcoin market cap has been moving sideways in a narrow range for the last more than a month. While the BTC price has largely remained around $70,000 since mid-February, it is stated that there are multiple reasons for this stability in the market. While the safe haven demand created by the geopolitical tensions in the Middle East during the said period kept the price at $65,000, rising US bond yields prevented Bitcoin from rising above $75,000.
The “covered call” strategy stands out in the options market
Investors’ tendency to seek returns in the options market instead of just buying and selling also contributes to the price remaining in its current range. In particular, institutional players regularly earn additional returns by writing call options on the BTC assets they hold above certain levels. Thus, as long as the market remains horizontal or slightly downward, profit can be made from option premiums.
Tesseract CEO James Harris pointed out that this approach was widely preferred among institutional investors during the first quarter of the year. “Institutional participants repeatedly sold call options at high points in anticipation of a price decline or sideways movement. These transactions transferred significant gamma positions to market makers at brokerage firms,” commented Harris.
It was stated that institutional investors continue to seek returns by selling call options, and market makers buy when the price falls and sell when it rises, in order to remain delta neutral, thus causing the prices to remain in a narrow band.
This strategy used in the options market is called “covered call”. Investors seek to earn additional income by writing put options on their Bitcoin assets; This method is classically known as an approach where spot position holders earn income from volatility.
A significant decrease in volatility was seen
In this process, as the gamma position pressure on market makers increases; He hedges his risks by selling whenever the price rises and buying when it falls. Ultimately, this mechanical buy-sell dynamic prevents prices from moving sharply up or down and keeps them within a narrow price range.
In parallel, Bitcoin 30-day implied volatility index BVIV has also declined in recent days. Despite the increases in volatility indices, especially in the stock, bond and oil markets, BVIV decreased by 5 percent to 56 percent.
James Harris evaluated that, despite macroeconomic developments, “The volatility resulting from these strategies of market makers is mechanically suppressed. The DVOL index recorded a contraction of approximately six points this week.”
In conclusion, one reason why Bitcoin is moving in a narrow band is the search for returns that investors use in the options market and the risk management strategies that market makers follow in response.
