The early 2021 retail-driven short squeeze of GameStop (GME) stock captivated global financial markets. A closer look revealed that retail investors massively bought GME call options, effectively using these instruments to harness vast institutional capital and ultimately stage a dramatic comeback against professional short-sellers.
The power of options was on full display during this "short squeeze." Their non-linear payoff structure allows investors to employ significant leverage—often greater than that of futures contracts—with a relatively small amount of capital, enabling more diverse and sophisticated trading strategies.
Just days before this event, the crypto exchange Binance had launched its European-style options. Shall, the product manager for these options at Binance, noted that the buzz from the squeeze spilled over into crypto, unexpectedly increasing the proportion of retail investors participating in options trading.
In the first half of 2020, Binance had introduced a simplified American-style option. The subsequent addition of European options signaled its intent to expand its derivatives offerings. Shall explained that due to the higher volatility inherent in crypto assets, Binance designed a particularly responsive and rapid risk management system. This system monitors all user positions in real-time to proactively identify and mitigate potential risks.
Acknowledging that many users are new to options, Shall believes that beyond educational content like videos and documentation, the product itself must be simplified. For instance, Binance's European options are settled in USDT, making them more intuitive and straightforward than platforms that use BTC for settlement.
"The next step involves designing and packaging products that are easier for the average user to engage with, such as wrapping deep out-of-the-money options into a lottery-like format," Shall stated. The philosophy is that making the product simpler is more effective than forcing users to climb a steep learning curve.
While the traditional options market is mature, the crypto options landscape is still in its early stages. Since last year, major exchanges like Binance, OKEx, and Huobi have entered the fray. With increased adoption and promotion, the market size for these instruments is poised for significant growth. This same "weapon" that helped US retail investors challenge institutions is now offering crypto traders a wider array of strategic choices.
The Real Battleground: The Options Market
As the fervor around the Gamestop (GME) short squeeze cooled slightly—after several US trading platforms restricted transactions—the retail epicenter, the subreddit wallstreetbets (WSB), expanded its battlefield to include silver and crypto assets.
This epic financial event captivated global attention due to its dramatic narrative of "retail traders banding together to defeat Wall Street short-sellers." Analysts noted that simply buying stock outright wasn't enough to secure victory; the true driving force was the amplifying effect and coercive power of options.
"If they had only bought shares, retail traders would have remained outgunned against institutions. But by purchasing a massive volume of call options, they leveraged enormous capital to ultimately pull off an upset," explained Shall.
Shall provided context: a common tactic in the US financial industry involves investment firms and research agencies collaborating. The investment firms short a stock, and the research agencies then publish negative reports to spark panic, drive the price down, and profit. This often pits institutions against retail investors, with institutions using their informational advantage to "harvest" gains from retail traders. This dynamic has long fostered a deep-seated antagonism.
Before the GME counterattack, famed short-seller Melvin Capital had already established a significant short position, reportedly shorting over 140% of GME's float. The stock price had fallen from highs above $40 to under $20. The plan was likely to partner with research firms, publish bearish reports highlighting pandemic-related struggles for the brick-and-mortar retailer, and further drive down the price, potentially even pushing the company toward bankruptcy. This is a套路 (tactic) Melvin was familiar with.
However, this generation of retail traders refused to be harvested. Past grievances had built up sufficient collective anger.
Retail traders massed on the WSB subreddit and, under the leadership of figures like DeepFxxkingValue (Keith Gill), who posted his own holdings and profits, rallied to buy GME and push the price up against the institutions.
The Weapon of Choice: Deep Out-of-the-Money Options
Beyond buying shares, the retail collective, following their leaders, also purchased vast quantities of deep out-of-the-money (OTM) call options. Shall pointed out that these options are "incredibly cheap and offer massive leverage."
"To clarify, a deep OTM call option has a strike price significantly higher than the current market price," Shall illustrated. For example, when GME was under $20, calls with a $40 strike were considered deep OTM. The probability of the price skyrocketing past $40 in a short time was very low, making these options very cheap—sometimes just pennies each.
The WSB leaders identified these deep OTM options as a critical vulnerability. On January 13th, after retail bought huge volumes of these options, they collectively began aggressively purchasing GME shares, quickly driving the price above $40 before institutions could effectively respond.
This move didn't just panic the short-selling firms; it also terrified the market makers who had sold those options.
Ordinarily, the chance of the price breaching $40 was minimal, so selling these options was considered low-risk, and market makers held few对冲 (hedging) positions.但当股价突然暴涨超过40美元时，做市商的投资经理们只能疯狂筹措资金，买入GME股票现货。否则，股价继续上涨，他们卖出的看涨期权将亏得越多。
Shall explained that the retail coalition had activated a massive leverage mechanism: an option bought for pennies now required the market maker to potentially buy $40 worth of stock to hedge the risk.
This initiated an unstoppable "gamma squeeze": as prices rose, option sellers were forced to deploy enormous capital to buy shares for hedging. This buying pressure further drove up the stock price, increasing the value of the options held by retail. Retail traders then sold their profitable options and used the proceeds to buy even more calls with higher strike prices, forcing market makers to buy exponentially more shares. "The snowball was formed, and anyone trying to stop it was crushed."
After some futile attempts to resist, the short sellers capitulated. Melvin Capital reported massive losses and closed its position, while Citron Research announced it would no longer publish short reports. The retail alliance emerged victorious, with some leaders seeing returns exceeding 4000%.
This event demonstrated that retail investors, using options to leverage the capital of market makers on the other side of their trades, could indeed challenge institutional players. This spotlighted the unique power of options as a derivative tool.
With reports of WSB moving into crypto, interest in crypto options grew. Shall noted that following the event, trading volume for Binance's European options increased unexpectedly, with many users turning to options during periods of high volatility. In turbulent markets, the unique feature of options—"high leverage without liquidation risk"—becomes a significant advantage. Unlike leveraged futures, an options buyer cannot be liquidated before the expiration date. No matter how volatile the price gets, the long option position remains open, allowing for profit as long as the price moves favorably before expiry, thus avoiding the frustration of being "right on direction, wrong on liquidation."
Could a Retail vs. Institution Showdown Happen in Crypto?
So, could a similar "short squeeze" occur in the crypto asset market?
Shall indicated that analogous situations have already happened. During Bitcoin's rally from $20,000 to $40,000, many investors opened long positions in the perpetual swap (contract) market. This pushed the futures price significantly above the spot price, creating a basis that attracted arbitrageurs. The result was a structure where retail traders were long futures with high leverage, while arbitrage firms shorted futures and simultaneously bought an equivalent amount of spot BTC to hedge. This meant a retail trader using 1,000 USDT to open a 50x long position effectively forced an arbitrageur to buy 50,000 USDT worth of spot BTC to hedge. Bullish traders, through futures, borrowed substantial capital, further fueling the price rally.
This futures example shows how investors can use leverage to accelerate a trend. Compared to futures, options can mobilize even greater capital due to their structural leverage.
"The unique aspect of options is their 'kinked' payoff curve," Shall explained. Unlike the linear payoff of futures, buying a call or put option offers limited loss (the premium paid) and theoretically unlimited profit potential. "For example, an investor buying a BTC call option with a $40,000 strike expiring on February 15th would see exponential gains if BTC reaches or exceeds $40,000. If BTC fails to reach $40,000 or even crashes to $30,000, the investor's loss is capped at the premium paid for the option."
This characteristic allows for more strategic variety. A miner worried about future price drops can buy put options. If the price falls, the option's profit offsets the loss on the mined coins. If the price rises significantly, the miner only loses the premium but still benefits from the higher selling price. Using futures for hedging would involve selling expected future production at a set price, locking in a price but forfeiting upside potential.
Due to their unique traits, options are gradually permeating the crypto space. Since last year, major exchanges including Binance, OKEx, and Huobi have launched options products. Binance, notably, offers both a simplified American option and a more traditional European-style option launched in late 2020, thus rounding out its product suite.
Shall stated that the decision to offer European options, which align closely with traditional finance logic, was driven by long-term market development goals. Institutional players within crypto need relatively complex and complete products to fulfill their extended investment theses and strategic combinations. Consequently, Binance's BTC options support multiple strike prices and expiration dates, allowing participants to freely act as buyers or sellers. Importantly, selling (writing) options is permitted without restriction to maximize strategic flexibility for investors.
"Shortly after Binance launched European options, the US stock short squeeze erupted. We were surprised to see a noticeable increase in retail traders using Binance's European options," Shall revealed. The GME event brought heat to the crypto options market. "Initially, this product was primarily used by professional institutions, but now retail participation is ignited." He believes acceptance of options in crypto is gradually increasing.
How Do Crypto Options Differ from Traditional Options?
"Traditional European options are already mature products, so we didn't alter the core business framework significantly," Shall said. The greater challenge in developing a European options product lay in risk management.
The volatility of crypto assets and the probability of black swan events are substantially higher than in traditional markets. This demands stricter risk controls for crypto options products. "Binance designed forced liquidation and settlement mechanisms to mitigate risk. During extreme volatility, the positions of option writers are liquidated or reduced promptly to prevent exacerbating market impact."
Furthermore, Shall explained that traditional financial risk management is built upon established financial products, mature participants, and monetary systems. Many exchanges and brokers trade on margin; a broker selling an option might book it initially and settle with the exchange later.清算风险 (Liquidation risk) is addressed reactively. In crypto, without this broker layer, that logic doesn't hold. Therefore, Binance built a sensitive, rapid system to monitor all user positions, preemptively judge risk, and execute controls.
Simplifying Products for Market Growth
Research data shows that the crypto options market has expanded rapidly since 2019. By the end of 2020, the market size was ten times larger than at the beginning of the year, with platforms like Deribit, LedgerX, OKEx, CME, and Binance contributing significant volume. The blue ocean of crypto options is clearly emerging.
In Shall's view, the crypto options market has potential for over tenfold growth. "Currently, it's mostly institutions and a minority of professional traders using options. The majority haven't participated yet."
The challenge for exchanges offering options is educating investors on the product logic, associated risks, and how to use options effectively for strategies like speculation and hedging.
An options-focused investor noted common hurdles across platforms: complex trading interfaces unfriendly to beginners, poor liquidity—even for at-the-money options making it difficult to fill orders at fair prices—and the use of BTC for settlement on many platforms, which complicates accounting as the value of BTC itself fluctuates.
Some platforms attempt to guide new users with simplified interfaces and predefined options selections. However, low liquidity often remains a barrier to entry.
Shall acknowledged this issue. Binance's initial solution was a simplified American-style option with expiries under one day and no option writer (the exchange was the counterparty). "This product was quite popular among retail users and provided inspiration for designing our European options."
According to Shall, Binance's European options use a T-style quote display for intuitive selection and are settled in USDT for straightforward accounting. "Using BTC for settlement can cause profits to shrink if BTC's price falls and complicates quantitative models."
Regarding liquidity, Shall noted that Binance's large user base attracted participants to its European options from the start. The exchange is also continually engaging market makers to improve depth.普及 (Popularizing) options in the crypto market is a marathon, not a sprint, requiring both steady progress and clever product design.
"For user education, Binance produces videos and documentation and may run training camps," Shall said. But more importantly, the focus is on product simplification. "Instead of making users learn a complex product, we make the product simpler." He revealed that the next step involves designing lightweight products, like packaging deep OTM options as a lottery-like ticket—characterized by very low premium cost and potentially high returns, but with the added attraction of being based on analyzable market trends, unlike a pure lottery.
Overall, options are becoming hot infrastructure in crypto. Beyond major exchanges like Binance and OKEx, new specialized players like Bitwell and Bitoffer have emerged. With multi-faceted development and promotion, the options market is set to expand further. This instrument, which helped US retail investors challenge giants, will bring its unique advantages to crypto, offering investors more diverse strategic choices. 👉 Explore advanced options trading strategies
Frequently Asked Questions
What is the main advantage of trading options over futures?
The key advantage for buyers is defined risk. Your maximum loss is limited to the premium you pay for the option, regardless of how far the market moves against you. This allows for high leverage without the risk of liquidation from adverse price movements before expiration, a significant risk with futures contracts.
How does a "gamma squeeze" work?
A gamma squeeze occurs when a rapid rise in the underlying asset's price forces market makers who sold short-dated call options to buy increasing amounts of the asset to hedge their exposure. This hedging activity itself fuels further buying pressure, creating a feedback loop that can lead to explosive price increases, as seen in the GME event.
Are European-style options different from American-style?
Yes. European options can only be exercised at expiration, while American options can be exercised at any time before expiration. For the buyer, European options are often simpler as they remove the decision of when to exercise, making them purely a play on the price at expiry.
Is options trading suitable for beginners?
Options are complex derivatives and carry significant risk, especially for sellers/writers whose potential losses can be substantial. Beginners should start by thoroughly educating themselves on the concepts of calls, puts, strikes, and expiration. It's highly advisable to begin with small amounts of capital and utilize practice accounts if available.
Why is USDT settlement considered an advantage?
Settlement in a stablecoin like USDT simplifies accounting and risk assessment for traders. Your profit, loss, and collateral requirements are calculated in a stable value unit, removing the extra variable of BTC's price volatility from your P&L calculation, which happens if options are settled in BTC.
What does 'deep out-of-the-money' mean?
An option is deep out-of-the-money if its strike price is far from the current market price. A deep OTM call has a strike price much higher than the market price, while a deep OTM put has a strike price much lower. These options are cheap but have a low probability of finishing in-the-money, hence the lottery comparison.