BlackRock’s Spot Bitcoin
Now they may have to do the same for options related to ETFs following the explosion of activity during Thursday’s selloff. According to one observer, the record activity stemmed from a slump in hedge funds, while others disagreed, citing routine market turmoil as the catalyst.
What really stood out was
Options volume exploded to 2.33 million contracts on Friday as the ETF plunged 13% to its lowest level since October 2024, with puts narrowly outpacing calls.
The fact that puts saw more volume than calls on Thursday suggests greater demand for the downside protection that typically occurs when prices sell.
Options are derivative contracts that provide built-in insurance against price movements of the underlying asset (in this case IBIT). You pay a small fee (premium), but not the obligation, for the right to buy or sell IBIT at a set price until the due date or expiration date.
A call option allows you to lock in IBIT at a set price today for a small premium. If it later rises above that level, you can buy it cheap and sell for a profit. Otherwise, you will only lose your premium. A put option locks in the sale of IBIT at that price. If it slides down, you can sell at a higher price and pocket the difference. Otherwise, you will only lose your premium. Call options provide a bet on upside potential, while put options protect against a downside plunge.
Another notable figure was the record $900 million in premiums paid by IBIT option buyers that day. This is the highest daily total ever. To put this into context, this is equivalent to the market capitalization of several cryptocurrency tokens outside the top 70.
Speculative theory: record activity linked to hedge fund explosion
A post by market analyst Parker that went viral on Funds often focus on just one asset to avoid spreading risk exposure elsewhere.
Parker’s post claims the fund initially bought cheap “out-of-the-money” call options on IBIT after the October crash, hoping for a quick recovery and bigger rally.
These OTM calls are like cheap lottery tickets that play well above the current price of the underlying asset. If the asset rises beyond this level, these calls generate significant profits. Otherwise, the buyer of that currency loses the premium initially paid.
However, the fund used borrowed money to buy these calls. As IBIT continued to fall, they doubled down on their bets.
As IBIT crashed on Thursday, the value of these calls plummeted and brokers hit the funds with margin calls demanding cash/collateral. The fund, which had been draining money elsewhere, was unable to provide the same and ended up dumping large quantities of IBIT shares into the market, resulting in a record $10 billion in spot trading volume.
The fund also desperately replaced expiring or loss-making calls that ended, resulting in a record total premium payout of $900 million. In essence, Parker associates recording activity with scrambling by one or a few large players rather than routine transactions.
Shreyas Chari, Director of Trading and Head of Derivatives at Monarq Asset Management, said it best: “Yesterday’s systematic selling across the majors was probably related to margin calls, especially from the IBIT ETF, which has the highest cryptocurrency exposure.”
“There were rumors that the option sellers had to sell the underlying much more aggressively after 70,000 and 65,000 went bust. This was probably related to the level of liquidation. This accelerated the decline to 60,000,” he explained in a Telegram chat.
Options experts disagree.
Pelion Capital founder and options expert Tony Stewart believes IBIT options have added to the market turmoil, but he doesn’t blame a single fund explosion for the overall crash and record activity.
Citing Amberdata, he claimed that $150 million of the $900 million premium for X came from put option purchases. In short, traders who previously sold put options suffered significant losses when IBIT plummeted and the value of the put options soared, so they repurchased the put options to reduce their risk.
He said it was a “definitely painful” close for
Essentially, for Stewart, record activity is just the messy noise of a market with widespread panic rather than a smoking gun pointing in one direction. “This (hedge fund explosion theory) is inconclusive from an options perspective. I don’t think it’s big enough,” he concluded.
Nonetheless, he acknowledged the possibility that some activity may be hidden in over-the-counter (privately negotiated) deals.
conclusion
While Parker connected the dots to point to the hedge fund explosion, Stewart used hard data to tackle the same problem.
Anyway, this episode highlights that IBIT options are now big enough to have an impact and that traders may want to track IBIT options just like they do ETF inflows.