Covered calls and their impact on Bitcoin

I've been coming across this idea that might shed some light on why Bitcoin hasn’t really moved up this year, while other assets like gold, silver, real estate, and stocks have been climbing. The gist of it is that big Bitcoin holders are selling call options to make some income. Here’s how this goes down: Imagine I’ve got 20,000 Bitcoin and I want to earn some cash. I could take 10,000 of those and sell covered calls. If Bitcoin's sitting at about $88K today, I could sell calls with a strike price of $100K that expire in a month. If Bitcoin stays under $100K, I keep my coins and pocket the premium. But if it hits $100K, I have to sell the 10,000 Bitcoin I used for those calls. It might look risky since I only have 20,000 Bitcoin, but what if I actually have 50,000 or even 100,000? I could just sell calls against 10 or 20% of my stash. Only the 10,000 Bitcoin I put up for those calls impact the trading volume and price. The rest of my holdings? They don’t touch the price at all. It’s pretty easy to see how this could keep the price from rising. I’ve seen this theory pop up in a few discussions, but just to throw in a reference, here’s one: Bitcoin Long-Term Holders Suppress Price Through Covered Calls, Says Market Analyst Jeff Park What’s your take on this?

I don't know why I'm not surprised that a thread in this section that requires a little thought hasn't gotten any responses. Related to this, nearly $24 billion in call options expire today. Biggest-Ever Bitcoin Options Expiry to Take Place Tomorrow This expiration would coincide with what I explained in the OP: covered calls have a dampening effect on price increases. When they expire, that effect disappears. And that would coincide with the price increase we are seeing today. But nothing prevents new covered calls from being placed soon and the dampening effect from returning.

With some bit application of your theory on the Investors and traders setting targets and taking profits when they hits the green lights could be considered as the event that weakened the market pressures. I may not totally agree to your opinion because I am not too connected with your data and analysis. What I think is that... $120K was in a very high anticipation which lot of investors had also assumed higher positions but the average price was all based on individuals satisfactions that they had to sell to collect profits While re-entering a new target. Unfortunately the sells was massive which weakened the volatility momentum.

It's not my theory or my opinion, it's a hypothesis that I've been seeing around for a while and, since it's plausible, I wanted to mention it in the forum to see what people thought. I'm not saying whether it's right or wrong, I'm just explaining what I understand about it.

I have doubts that this is really an obstacle for upside price action. If anything, it adds a bit of liquidity. Put and call options should also create a sort of equilibrium. They limit the price action both to the upside and to the downside. When there is fear in the market, my interpretation is that there is more demand (and thus also a higher premium) for put options than for call options. And I think the market is still nervous: the Crypto Fear & Greed index is currently at 28. That's already an improvement on the lowest values in the last weeks, but it's still "Fear". On the other hand, the put call ratio is indeed quite low currently, already since the start of December the values are comparable or even lower than in July. This indicates that there are more call options than put options volume, and thus that the option market is currently bullish . Actually most of the year the ratio was under 1, so the "price limiting" effect could have been stronger to the upside than to the downside. It can also mean that the whales making money with their BTC may drive the prices for those options down and thus they have more volume than put options. To compare this with previous bull runs we would need charts going back several years. This article says that during 2024 the put-call values were also low (around 0.5, similar to currently), and they could not hold back the move from ~50k to ~80-100k. It's possible however that the volume in general was also lower back then and thus the effect was weaker.

Well, first of all thanks for the reply. This is a topic I have just discovered (although I had a minimal understanding of puts and calls previously). However, it is clear that you have more knowledge than I do. However, I still think covered calls might have at least a limiting influence on upside price action. So if a lot of people sell those covered calls they are like capping their upside and, even if they do not directly increase supply, if there is more supply for sale (even if it is only when it reaches a certain price), there is more downward pressure. Then there is another thing. If there are many covered calls for, say, $100K, I think there is a double psychological effect, because normally, without taking covered calls into account, when the price approaches round figures like that, there is a wall of sell orders, to which we have to add this one from the covered calls. Then, when you talk about the put-call ratio and do the time analysis, I'm not going to get into that because I'm sure you know more about it than I do. But in the end, I don't know if we're not both saying the same thing. You doubt that they are an upward obstacle, and I doubt that they aren't. Maybe they have some influence on the price, but it's not decisive.

I'm not an expert either. But I'm a bit interested in options and their dynamics, so I have read a little bit about them. Just because they are a mechanism to hedge against Bitcoin's volatility, and thus they are important for merchants (of course also for traders) to limit their risk. (As I think you know, I'm a proponent of Bitcoin "as a currency"). I think as they increase liquidity, they are both an obstacle for the price moving upward and downwards. That's why I mentioned the put-call ratio: if it's under 1 (and that has been the case in the last 2-3 years practically constantly), i.e. there are more call options than put options traded, then options are more of an obstacle to upward movements than to downward movements, and your assumption, in principle, is correct. However, the difference in our assessment is that I doubt that options add that much more sell pressure than other mechanisms (like classic limit orders or trailing stop loss orders). And thus, as the put-call ratio was even lower in 2024 when the price increased more than 100% from low to high, then at a first glance it doesn't look that the "limiting effect" is very notable. On the other hand, I remember situations in 2024 where the price also seemed to be limited to the upside. Mostly in the time after the 73k (i think) high in early 2024. I have however still not seen exact put-call ratio charts for 2024. Regarding the psychological effect, I think indeed it is possible that much demand/open interest for call options at a certain strike price could "enforce" that price as a resistance. There seems to be even a word for that: the "Call Wall". See for example this article. It's not only psychological, it also is created by hedging by traders. On the other hand, in the last year at least, big movements (both to the upside and the downside) often were only achieved when there was a liquidation of leveraged positions (short squeeze or long squeeze). This means if there is enough upward pressure, then traders who previously feared the "call wall" probably would prepare for such a "breakthrough" and cease their selling and wait. That's why I think that this "wall" is only effective if the upward movement would be weak anyway and could crumble at any time (at least that traders would fear that).

Would that covered calls cause bitcoin to dump from over $100k to 90k? I think your explanation is definitely one of the reasons why the price is stagnant, but while this makes BTC lose some upside potential, there's also the downside. IMO this downside is the work of insiders, possibly even that shitty stablecoin that Trump's family is behind. The first large crash this year was due to tariffs being imposed on China. Then there was the second large dump exactly when Trump tweeted about new tariffs over the weekend, when bitcoin market was the only one trading. Not to mention that some of the BTC that was supposed to become the US crypto reserve is nowhere to be found and people who were supposed to establish said fund have either resigned or started to avoid the topic in public speeches. Maybe I just like conspiracies, but IMO the US government has sold the coins that were supposed to become the Strategic Reserve and people close to Trump and Bessent, who knew about it, were selling into the FOMO earlier this year. This is the reason why Bitcoin barely moved the last 12 months despite all the media and bank analysts saying that we should be at 150-200k by now.

Paper call options are weaker then Bitcoin itself, there is no fractional reserve or leverage behind BTC to really see that it would be degraded beyond the short term by the availability on paper for people to hold BTC.    Like many trading dynamics its about short term liquidity, ironically that makes it bullish if true as it can not provide supply long term to continue that condition.    Most people know shorts can end up reversing and being bullish in stocks and I would relate it to that.   We have lower demand following excessive uptake at the start of the year with a new administration pro crypto, but I dont rate government as a reason to buy and thats how its turned out.

Worth mentioning for people who may not be tapped in with covered calls or have the ability to sell options themselves… BTCI is an income producing fund that sells covered calls on BTC and pays out dividends to shareholders. A little too risky for me as you give up any upside for income, BALI is more my speed for covered call income (and I do sell covered calls on my personal investments also).

You've quite convinced me. They might have influenced. Well, yes, I do think it's a conspiracy. Well, those kinds of sales have to be published at some point. BTCI doesn't seem to be doing very well this year, down 30%. Just yesterday I was looking at Yielmax ETFs, which started off very well during the bull market, but this year they have abruptly reduced dividends while the share price has gone to hell.

Ya, they’re paying a giant yield and BTC has gone down over the last year… I don’t own any and I’m not saying to buy it, but it does kick off income from covered calls. Personally I would be a little less aggressive and take less income for less NAV erosion, but some folks like to see cash flow. I would recommend buying IBIT and selling your own covered call options if you know what you’re doing.