Bitcoin ETF Options: Higher Limits, Lower Volatility?
Bitcoin ETF Options Limits Increased: Impact on Volatility and Demand
The Securities and Exchange Commission (SEC) has raised position limits on options for most bitcoin ETFs, a move that could reshape Bitcoin's price dynamics.
NYDIG Research suggests that the increased limits will facilitate strategies like covered call selling, which can dampen price swings by trading upside potential for consistent income.
How Higher Limits Could Stabilize Bitcoin
- Covered Call Strategies: The increased limits allow for more extensive use of covered call strategies.
- Volatility Suppression: These strategies generate yield from existing holdings by selling upside exposure, naturally suppressing price movement when implemented across large portfolios.
This decision follows the SEC's approval of in-kind redemptions for spot bitcoin ETFs, further integrating these investment vehicles into the broader market.
Declining Volatility and Institutional Investment
Bitcoin's volatility has been trending downwards, with Deribit’s BTC Volatility Index (DVOL) dropping from approximately 90 to 38 over the past four years. Despite this decline, Bitcoin remains more volatile than traditional assets like bonds and stocks.
The shift could make Bitcoin more appealing to institutional investors who require stable exposures.
According to NYDIG analysts, "As volatility declines, the asset becomes more investable for institutional portfolios seeking balanced risk exposure. This dynamic could reinforce spot demand.”
Ray Dalio recently suggested a 15% allocation to gold and crypto amid rising debt levels, highlighting the growing acceptance of these assets in diversified portfolios.
The Feedback Loop: Lower Volatility, Higher Demand
NYDIG concludes that “The feedback loop of falling volatility leading to increased spot buying could become a powerful driver of sustained demand.”