Sometimes it’s better to be lucky than good.

Last week, we did a deep dive into Microstrategy, $MSTR. Today, MSTR is up 79% from that post — outpacing bitcoin by 4x over the week.

This is the magic of focusing on positive skew opportunities. It’s not about predicting the future, it’s about putting yourself in a position to make a gigaton when you’re right and lose only a pinch when you’re wrong.

This week we’re going to let it ride and talk about another angle to get bitcoin exposure with enhanced risk / reward characteristics.

Yesterday, options contracts on the Blackrock Bitcoin ETF — $IBIT — began trading. Today’s post is looking at what those contracts are telling us about the future, and ways to position ourselves to profit in the short term.

Market Vibes

Crypto Reads

Retail Options Trading: [book] If you like or are interested in options trading, I’m working through this book right now. It came highly recommended, and so far it’s really good.

IBIT Options trading recap: Lots of interesting details and charts if you want to go deeper.

Reading the Options Crystal Ball

If you’re new to options, here’s some links to get the basics.

• Investopedia: Beginner’s option trading tutorial

• The Options Industry Council: Lots of free materials here. High quality.

For today, I’m going to mostly focus on what the options chain for IBIT is telling us about the next few weeks of bitcoin price action (and indirectly, the crypto market broadly).

I’m not recommending any specific options trades or setups. If you want to trade [cough gamble cough] options, be careful out there.

Most retail traders just punt long, out-of-the-money calls. That can work, especially in squeezes like what happened to GME (more on squeezes later), but this is a blunt instrument that leaves open risks you don’t need to take.

Instead of punting naked calls/puts, do the extra work to structure your trades to not only give you the upside, but also protect your downside risk. Use spreads, strangles, straddles, etc. where it makes sense. Options are complicated - proceed with caution.

There’s a lot of bullishness in the market. Let it ride! But know that volatility works both ways — you’ve got to stay disciplined and focused on risk!

IBIT Options and Implications for Bitcoin Price and Volatility

We can use the options market to predict the future by analyzing the volumes and premiums for calls and puts at various expirations and strike prices in the IBIT options chain.

It’s not that different from a prediction market like Polymarket — the wisdom of the crowd is the collective real-money bets made by investors in aggregate all over the world.

I’ll stop burying the lede — the market is hilariously bullish and is positioned for another huge leg up in the price of bitcoin before year-end. I calculate the price target below.

But that’s not the most interesting thing I learned.

I heard an interesting theory on the 1000x Podcast and pulled some numbers that confirm it — the current structure in the market leaves open a decent possibility for a type of squeeze caused by dealer negative gamma hedging (I’ll explain in more detail later on).

If that happens — throw your price target out the window.

Running the numbers on the IBIT Options Chain

Let’s start with implied volatility — the market’s expectation is for very big price swings. Most traders are positioned for big moves up, but there is risk for big moves down if some shock causes a sudden drop.

• Elevated Option Premiums: There are high premiums for both call and put options across various strike prices, indicating elevated implied volatility. This is especially pronounced on near-dated contracts. I’m going to mostly focus on the 12/20 contracts.

• As I write this, the December 20th $65 call has an implied volatility of 71%. That’s a lot of vol.

• The $43 put contract, symmetric to the $65 call, has an implied vol of 63%. Again, that’s a lot of vol.

• Market Anticipation of Significant Price Movements: The substantial premiums suggest that traders expect significant volatility in IBIT—and by extension, Bitcoin—leading up to the December 20, 2024 expiration date.

There is also a huge volume running through these contracts, affirming the signal further.

Remember, yesterday was the first day these options were available to trade. At the time of writing:

• $65 Strike Call Option: Volume of 15,321 contracts.

• $55 Strike Call Option: Volume of 7,463 contracts.

Put volumes have comparatively lower volumes, indicating less interest in hedging against price declines. The put-call ratio is at 0.26, with roughly 75 thousand call contracts against just 20 thousand put contracts. Translation: BULLISH.

Let’s put a price target on it - $116,000 by Christmas

Let’s assume for this analysis that bitcoin and IBIT are perfectly correlated. We’ll ignore fees and inefficiencies and tracking error and all that.

The $65-strike call has the highest volume of contracts for December 20th, so let’s use that. The market is betting that’s where we’ll end up.

The breakeven for those call options is the strike price plus the premium.

That’s $65 strike plus $1.25 premium (as I write this — it’s going to move by the time you read) = $66.25 breakeven.

Translating $66.25 IBIT price to bitcoin, assuming perfect correlation, we get a price target of ~$116,000 per bitcoin by December 20th, a 23% jump in the next 3-4 weeks.

It’s worth saying again — this price target is the implied highest probability outcome based on traders in the IBIT options chain.

This is probabilistic, not pre-ordained.

Take a look at the chain for yourself. Notice the contract volumes, premiums, and how they change as you move away from current prices.

The concentration of trading activity at higher strike prices is pure, crispy, unfiltered speculative optimism.

Animal spirits.

Higher.

The BTC derivatives market is going bananas

Open interest represents the total outstanding, unsettled futures contracts on the CME (the Chicago Mercantile Exchange).

Higher open interest = more futures bets.

Futures have implicit leverage, so the CME open interest data is an excellent signal to layer into options analysis.

Rising open interest means more money entering the asset. More money entering = more buying = higher prices.

Here’s the open interest data if you want to take a closer look.

Open interest isn’t a leading indicator, per se. However, it does tell you a lot about market euphoria and can confirm other signals (like the IBIT options chain).

It’s pretty obvious from the chart that periods of rapid open interest growth align with significant price rallies, which makes sense through the lens of new flows of leveraged trading activity.

• Heightened Speculative Interest: The surge in open interest suggests that traders are increasingly using leverage to amplify exposure to Bitcoin.

• Potential Overheating: The simultaneous increase in open interest and price can also signal an overheated market, raising the risk of volatility spikes due to potential liquidations. (remember that 61% implied volatility on the $44 put!)

There’s been a big ramp up in speculative bullishness. We see it in the calls and we can see it here in the open interest.

Given the market structure, it’s probably going to go nuts and up. But the implied vol and heightened leverage does leave prices vulnerable to downward shocks.

You can see it in Microstrategy’s options structures as well. Check out this thread:

Price target $500,000? Dealer Negative Gamma Hedging

Dealer negative gamma hedging sounds complicated. It’s actually not toooo bad.

When an investor buys a call option, someone has to sell them that option. That’s the market maker, or the dealer.

The dealer is kind of like a bookie. They want to structure bets so they make money regardless of who wins or losses, or if prices go up or down.

If a market maker sells you a long call, they make money if the price goes down (your premium) and lose money if the price goes up (the difference in the asset price).

To ensure that they don’t lose money when the price goes up, they will hedge your option contract by gobbling up some spot bitcoin on the open market. That way the price goes up, you make money on your call, and their loss is offset by their own long bags.

This balancing act is called staying “gamma neutral.” If dealers write a bunch of long call options, they will find themselves in a negative gamma position, and must buy spot bitcoin to remain delta-neutral.

Let’s play this out:

1. Investors buy a shit ton of long calls.

2. Market Makers/Dealers end up with negative gamma and must hedge.

3. To hedge the dealers must buy bitcoin.

4. The dealer’s buying drives up prices.

5. Feedback Loop: Higher prices leads to more euphoria, leads to more long calls, leads to more gamma hedging.

Remember that options contracts represents lots of 100. So if you buy 1 contract, they will need to get long 100 units in the spot market. That’s a lot of implicit leverage.

And that is how you end up with a squeeze higher, driven by a self-reinforcing hedging cycle.

The high volumes of sold call options at higher strike prices imply substantial negative gamma exposure for dealers right now. They’re going to have to hedge and already are.

Higher.

A word of warning: Don’t get rekt if there’s a correction

The worst possible thing that could happen to your crypto bags right now is to get liquidated. You can only get liquidated if you trade with leverage.

Look at the implied volatilities here. Look at Microstrategy. Look at all the available trade structures with options today (MSTR, IBIT, and even more ETF options more coming online today). There’s more volatility than you could ever need already, without margin trading or levering up on perps or futures.

Do. Not. Use. Leverage. Right. Now.

There’s a very good probability that bitcoin is going to rip through $100k in the next few weeks and rocket to new all time highs over and over. But it may not be in a straight line.

The implied volatilities here are pretty insane — there’s a real risk of violent pullbacks before we reach Valhalla and $500k per bitcoin.

The dip could come from anywhere. Just look around: Russia/Ukraine, Iran/Israel, China, an oil shock, another assassination attempt on Trump, the list goes on. These things happen. They are real risks. Bitcoin could pull back, alot and in a hurry.

Don’t risk being liquidated. Don’t trade crypto with leverage. Stay in the game. Find positive skew opportunities like MSTR, memecoins, IBIT options, and others.

What would Saylor say?

I fined tuned a LLM on a huge corpus of interviews and quotes from Microstrategy’s Michael Saylor. I gave the bot today’s newsletter and asked it to tell me what Robot Saylor would say. I think the bot nailed it. Enter Robot Michael Saylor:

Portfolio Update

I bought $MSTR on Monday 11/11.

I sold the rest of my Flare ($FLR) and about 25% of my $SOL, using the proceeds to load up on $BONK and $PEPE.

I consolidated SPX6900, MOTHER, and SCF and bought D.O.G.E.* 

(*NOT doge coin the big one*. I bought the D.O.G.E. small cap shitcoin that came directly out of the elon/vivek/trump thing. The solana address = KQijDbNJ6rPCqhtXrfH6gKa5cH3a39At8vHq34nnPbF )