Oddbean

What happens when people buy lots of call options: When you buy call options, you gain profit if the price of the underlying goes up, and incur a loss if the underlying goes down. Your loss is limited to the amount of money that you paid for a call option, and since there is no limit to how high the underlying asset can go, your potential profit is unlimited. Now, here's the important thing to understand: The market maker you bought that call option from is now short call options. This means that their potential profit is limited to the amount that you paid them for that call option, but their potential loss is unlimited because again, there is no limit to how high the price of the underlying can go. The market maker doesn't want to be exposed this way. They make their money on the price spread of the options, and on the time decay. They want to remain delta (price movement) neutral. To hedge the delta of the option, they will either buy the underlying asset, or something that moves delta 1.0 to the price of the underlying asset, such as futures contracts. This way, when the price of the underlying goes up, they gain profit on the underlying equal to the loss they incur from being short the options contract, so the two cancel each other out. Here's where this gets interesting: When the market participants start buying a lot of call options on these Bitcoin ETFs, it forces the options market makers to buy either spot Bitcoin or CME Bitcoin futures, which in a market with a very limited float like Bitcoin, will quickly drive the price up. This is called gamma squeeze and it can get WICKED. Then when the options expire or the holders of those options decide to sell, the market maker no longer needs the hedge and sells the underlying asset. This is why I keep saying just watch what happens when people start trading options on these Bitcoin ETFs. The pumps and dumps are going to get INSANE.