The revival of the bullish sentiment in the crypto market was evident as bitcoin (BTC), the leading cryptocurrency in terms of market value, surged over 15% last week, marking its best performance since March. Now, a major event awaits the market on the horizon.
On Friday at 08:00 UTC, approximately 150,633 bitcoin options contracts worth $4.57 billion and 1.23 million ether contracts valued at $2.3 billion will expire on Panama-based Deribit exchange, which accounts for over 85% of worldwide options activity. The bitcoin contracts set to close make up 43% of the overall open interest, as reported by Amberdata.
In recent developments, investors have purchased call options with strike prices at or above $30,000 for bitcoin. Consequently, this price point boasts the highest open interest, and market makers or dealers with significant “negative (short) gamma” exposure take the opposite side of investors’ trades. This open interest accumulation at the $30,000 mark indicates that the spot price could converge around this level leading up to the expiry. Currently, bitcoin is trading just above $30,000.
However, the dealers’ negative gamma positioning suggests that any slight deviation from the $30,000 mark could result in a substantial rally or price drop. When dealers have net-negative gamma exposure, they “buy high and sell low” as per the underlying’s bullish or bearish momentum to maintain a neutral market exposure.
Therefore, if bitcoin’s momentum remains above $30,000 as the expiry approaches, dealers may purchase the cryptocurrency in spot and futures markets, potentially leading to an exaggerated price rally known as a gamma squeeze, or the sling-shot effect. Conversely, dealers could be forced to sell if the price falls below $30,000. Greg Magadini, director of derivatives at Amberdata, expects a historic record of negative gamma before Friday’s expiration, hinting at potential fireworks.
Crypto derivatives trader Christopher Newhouse believes the impact of potential dealer hedging could be more potent than usual this time. As the bitcoin price hovers near $30,000 and potential short liquidation levels, dealer hedging flows might have a more exaggerated influence on spot prices. He noted that the $30,000, $35,000, and $40,000 strikes are among the most popular call strike targets.
In the case of ether, market makers have amassed long gamma positions, reducing the risk of a gamma squeeze in Ethereum’s native token. Griffin Ardern, a volatility trader from crypto asset management firm Blofin, expects market makers’ hedging to keep ETH relatively stable during the settlement.
Source: Coindesk
