BlackRock's spot bitcoin BTC$70,737.84 exchange-traded fund has been a massive hit since launch, pulling in billions from investors seeking exposure to the cryptocurrency without the hassle of crypto wallets or exchanges. Traders and analysts religiously track inflows into the fund to gauge how institutions are positioning in the market.

Now they might have to do the same with options tied to the ETF, as activity exploded during Thursday's crash. According to one observer, the record activity stemmed from a hedge fund blowup, while others disagreed, citing routine market chaos as a catalyst.

What really stood out

On Friday, as the ETF tanked 13% to its lowest level since October 2024, options volume exploded to a record 2.33 million contracts, with puts narrowly outpacing calls.

The fact that puts saw more volume than calls on Thursday indicates a higher demand for downside protection, a typical occurrence during price sell-offs.

Options are derivative contracts that provide built-in insurance against swings in the price of the underlying asset, in this case, IBIT. You pay a small fee (premium) for the right, but not the obligation, to buy or sell IBIT at a set price by a deadline or expiry.

A call option lets you lock in IBIT at a set price today for a small premium. If it rallies above that level later, you buy cheap and sell for profit; if not, you only lose the premium. A put option locks in the sale of IBIT at that price. If it slides below, you sell high and pocket the difference; otherwise, you lose just the premium. Calls offer leveraged upside bets, while puts protect against downside drops.

Another standout figure was the record $900 million in premiums paid by IBIT options buyers that day—the highest single-day total ever. To put it in context, that's equivalent to the market cap of several crypto tokens ranking beyond the top 70.

Speculative theory: record activity tied to hedge fund blowup

A post by market analyst Parker, which has gone viral on X, argues that the $900 million premium payments resulted from the blowup of a large hedge fund (one or a few) with nearly 100% of money invested in IBIT. Funds often focus on just one asset, avoiding spreading out risk exposure elsewhere.

Parker's post alleges that this fund initially bought cheap "out of the money" call options on IBIT following the October crash, anticipating a quick recovery and bigger rally.

These OTM calls are like cheap lottery tickets at levels well above the ongoing price of the underlying asset. If the asset rallies past these levels, these calls make significant money; if it doesn't, buyers of these calls lose the initial premium paid.

However, the fund bought these calls using borrowed money. As IBIT continued to drop, they doubled down on their bet.

On Thursday, as IBIT crashed, these calls tanked in value and brokers hit the fund with margin calls demanding cash/collateral. The fund, having bled money elsewhere, was unable to provide the same and ended up dumping large amounts of IBIT shares in the market, resulting in a record $10 billion spot volume.

The fund also desperately replaced expiring calls or closed loss-making calls, resulting in a record $900 million in total premium payments. Essentially, Parker associates the record activity with one or a few massive players scrambling, not routine trading.

Shreyas Chari, director of trading and head of derivatives at Monarq Asset Management put it best: "Systematic selling across the majors yesterday probably tied to margin calls especially in the ETF with the highest crypto exposure IBIT."

"Rumors swirled of a short options entity that had to sell the underlying far more aggressively after 70k and then 65k broke, probably tied to liquidation levels. This exacerbated the move down to 60k," he explained in a Telegram chat.

Options expert disagrees

Tony Stewart, founder of Pelion Capital and an options expert, believes IBIT options added to the market chaos, but doesn't go so far as to blame a single fund blowup for the whole crash and record activity.

He argued on X, citing Amberdata, that $150 million of the $900 million in premiums came from buying back put options. In short, traders who had previously sold (shorted) puts faced significant losses as IBIT crashed and those puts surged in value, so they repurchased them to cut their risk.

Those were "certainly painful" closes, he said on X, adding that the remaining portion of the $900 in premiums comprised mostly smaller trades, which is pretty standard for the hectic trading day.

In essence, to Stewart, the record activity is just the messy noise of a broadly panicked market, not a smoking gun pointing to a single way. “This [hedge fund blowup theory] is inconclusive from the Options standpoint. It also doesn't seem enough tbh in size," he concluded.

Still, he acknowledged the possibility that some activity could have been hidden in over-the-counter (privately negotiated) deals.

Conclusion

While Parker connected the dots to point to a hedge fund blowup, Stewart challenged the same with hard data.

In any case, this episode highlights that IBIT options are now large enough to wield influence, and traders might want to keep track of them just as they do ETF inflows.