Crypto traders expect $6.8 billion in Bitcoin and Ethereum options to expire on Friday. Sellers are flooded with record negative gamma in BTC. “We could witness fireworks,” says one observer, with just a small movement in the spot price.
Friday will be an important day for Bitcoin and Ethereum!
As you follow on Kriptokoin.com, Bitcoin has shown its best performance since March. BTC has recorded an increase of over 15% this month. Moreover, it started to blow the bullish winds again in the crypto market last week. Now an important event looms on the horizon.
At 08:00 UTC on Friday, 150,633 BTC options contracts worth $4.57 billion and 1.23 million ETH contracts worth $2.3 billion will expire on the Panama-based Deribit exchange, which controls more than 85% of global options activity. According to Amberdata, expiring Bitcoin contracts account for 43% of the total open interest.
How will it affect the Bitcoin price?
Investors have recently purchased call options with strike prices of $30,000 and above. As a result, this level has the highest open interest (or number of active contracts). Also, market makers/dealers who create order book liquidity by taking the other side of investors’ trades have significant short gamma exposure.
Options are derivative contracts. They give the buyer the right to buy or sell an asset at a predetermined price at a later date. The call option gives the right to buy a bull position. A put option provides the right to sell, which is a bear position. Short (negative) gamma means holding a short position on call or put options. The massive accumulation of open interest at $30,000 means that the spot price may head towards this level until maturity.
Meanwhile, dealers’ negative gamma position means a slight move away from $30,000 could turn into an explosive rally or price drop. This is because dealers holding a net-negative gamma position “buy high and sell low” when the underlying asset gains bullish or bearish momentum to maintain a neutral market position.
In other words, if Bitcoin gains momentum above $30,000 as the expiry approaches, dealers will buy the cryptocurrency in the spot and futures markets. It is also possible that this could lead to an exaggerated price rally, often referred to as gamma squeeze. On the other hand, sellers will have to sell on the possibility of falling below $30,000.
“Time to set the fireworks for BTC”
Greg Magadini, director of derivatives at Amberdata, said in the latest issue of the weekly newsletter, “This [uptrend] flow is having a huge impact on dealers’ positioning. We also expect a historic negative gamma record before expiry on Friday. With just a little spot movement, we can witness fireworks,” he says.
Options gamma is the rate of change in delta, which is the degree of sensitivity of options to a change in the price of the underlying asset. Gamma shows how directional risk exposure changes with fluctuations in the underlying asset. It also reveals how it rises as maturity approaches. Market makers provide liquidity to an order book. They also profit from the spread by constantly hedging gamma exposures to keep the book direction or delta neutral.
There is a large negative gamma on the $30,000 option strikes, which expire on June 30. Source: AmberdataAccording to crypto derivatives trader Christopher Newhouse, the impact of potential dealer hedging is stronger than usual this time around. “Many of the top-end call strikes ending this week are large,” Newhouse said. Also, there is gamma concentrated around $30,000 and around Bitcoin trading. Closer to expiry, dealer hedging flows can have a more exaggerated effect on spot prices than smaller weekly expirations. Especially as the price approaches previous highs and potential short liquidation levels,” he says.
In Ethereum’s case, market makers have accumulated long gamma positions in the ETH market. Therefore, the risk of a gamma squeeze in ETH is relatively low.
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