Bitcoin (BTC) and ether (ETH), the two leading cryptocurrencies by market value, have exhibited a rare calm for over two weeks. This behavior likely originates from the convergence of competing influences and narratives on the market. Contributing to this phenomenon is the invisible guiding hand of crypto options market makers, who some observers argue, are partly responsible for maintaining price stability.
Market makers are responsible for ensuring there is an adequate amount of liquidity on an exchange. By being contractually obligated to do so, they provide enough depth in an order book by offering buy or sell options contracts at any time.
Over recent weeks, investors have been shorting or writing call options, a volatility-selling strategy aimed at generating additional yield on top of spot market holdings. The increase in these bullish bets has led to market makers holding long call positions or positive gamma. As a consequence, market makers must continually trade against the spot prices’ direction to maintain their books’ neutrality, creating a negative feedback loop. Consequently, price ranges remain confined as hedging activity keeps the prices locked in a narrow range, making volatility sales more challenging.
David Brickell, the director of institutional sales at crypto liquidity network Paradigm, explains, “In the absence of a catalyst/narrative to start taking directional risk, that systematic, mechanical volatility-selling will keep weighing.”
This scenario showcases the options market’s growing impact on the spot prices, a pattern commonly observed within equities and foreign exchange markets. Crypto investors have consistently purchased call options throughout the 2021 bull market, resulting in market makers carrying short gamma positions. This trend has necessitated equilibrium-seeking trading within bitcoin and ether markets, leading to heightened price movements.
Griffin Ardnern, a volatility trader from a crypto asset management firm, noted that the record high positive gamma in ether could weaken following the upcoming monthly options expiry. The world’s largest crypto options exchange, Deribit, which controls nearly 90% of the market, is set to settle May expiry options on Friday at 08:00 UTC.
Ardnern cautions that the “sticky effect” of hedging on the price will weaken significantly, warning, “It is necessary to be careful about the risk of ETH price going downwards.”
Over the past month, bitcoin and ether have exhibited narrow trading ranges, with values hovering around $26,350 and $1,800, respectively, per CoinDesk data. As the crypto market’s landscape continues to evolve, watching the interplay between spot prices and options market dynamics will be a crucial aspect for investors to consider.
Source: Coindesk
