The covered calls theory for the current market

[Free Market Capitalist]

So, I’ve been hearing about a theory that would explain why this year Bitcoin hasn’t gone up despite almost everything doing so (gold, silver, real estate, stock market).

According to the theory, large Bitcoin holders are selling call options on Bitcoin to obtain income. This is how it works:

Let’s say I own 20,000 Bitcoin and want to obtain income. I can take 10,000 Bitcoin and sell covered calls. Today, BTC price is around $88K. I sell covered calls with a strike price of $100K with a 1-month expiry. If the price keeps below $100K I keep my Bitcoin and earn a premium. If the price reaches $100K I must sell my 10,000 Bitcoin stash that I put for the covered call.

This may seem risky thinking that I only have 20,000 Bitcoin but I may have 50,000 or 100,000 Bitcoin and sell covered calls with just 10 or 20% of my holdings. Only the 10,000 Bitcoin that I put up for covered calls are a part of the trading volume, thus affecting the price. The rest of my holdings don’t affect the price.

You don’t need to make a great mental effort to see how this suppresses upside price action.

I have seen this theory commented on different places but just to provide a link as reference here is one.

Bitcoin Long-Term Holders Suppress Price Through Covered Calls, Says Market Analyst Jeff Park


What do you think about it?

[Free Market Capitalist]

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.

[EluguHcman]

What do you think about it?

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.

[Free Market Capitalist]

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...

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.

[d5000]

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.