Crypto Traders Eye $6.8B in BTC, ETH Options Expires
The bullish buzz returned to the crypto market last week as bitcoin (BTC), the leading cryptocurrency by market cap, jumped more than 15% in its best performance since March. Now a significant event looms on the horizon.
On Friday at 08:00 UTC, 150,633 bitcoin options contracts worth $4.57 billion and 1.23 million ether contracts worth $2.3 billion will expire on the Panama-based Deribit exchange, which controls over 85% of global options activity. Bitcoin contracts due for settlement account for 43% of total open interest, according to Amberdata.
In bitcoin̵[ads1]7;s case, investors have recently purchased call options with strike prices at and above $30,000. As a result, this level has the highest open interest – or the number of active contracts – and market makers/dealers, who create order book liquidity by taking the other side of investors’ trades, has a significant amount of “negative (short) ) gamma” exposure.
Options are derivative contracts that give the buyer the right to buy or sell an asset at a predetermined price at a later date. A call gives the right to buy, a bullish position, and the put gives the right to sell, a bearish position. Being short (negative) gamma means having a short or sell position in the call or put options.
The large open interest buildup at $30,000 means the spot price could gravitate to around that level ahead of expiration. Bitcoin is currently trading just above $30,000, according to CoinDesk data.
Meanwhile, traders’ negative gamma positioning means that a small move away from $30,000 could lead to an explosive rally or price crash. That’s because traders, when they have net negative gamma exposure, “buy high and sell low” when the underlying picks up bullish or bearish momentum to maintain a neutral market exposure.
In other words, if bitcoin builds momentum above $30,000 as expiration approaches, traders will buy the cryptocurrency in the spot and futures markets. This in turn can lead to an exaggerated price rise, often called a gamma squeeze or sling shot effect. On the flip side, traders will be forced to sell on a potential decline below $30,000.
“This [bullish] the flow strongly affects traders’ positioning and before Friday’s expiration we expect a historical record (since we started tracking) negative gamma,” said Greg Magadini, director of derivatives at Amberdata, in the latest edition of the weekly newsletter. With only a small speckle movement we could witness fireworks.”
Option gamma is the rate of change in delta, which is the degree of options’ sensitivity to a change in the underlying asset’s price. Gamma shows how directional risk exposure changes with fluctuations in the underlying asset and increases as expiration approaches.
Market makers provide liquidity to an order book and profit from the bid-spread spread by constantly hedging their gamma exposure to keep the book direction, or delta, neutral.
According to crypto derivatives trader Christopher Newhouse, the impact of potential dealer hedging may be stronger than usual this time around.
“With several of the calls expiring this week in large size and gamma concentrated around $30,000 [level] and bitcoin trading near $30,000, dealer hedging flows as we approach expiration could have a more exaggerated impact on spot prices than some of the smaller weekly expirations — especially as prices coil near previous highs and potential short liquidation levels,” Newhouse told CoinDesk.
“At strike, the $30,000, $35,000 and $40,000 strikes are some of the most popular call strike targets, and many of these bets were taken just a few days prior as bullish exuberance begins to overwhelm some of the short-term market flows,” said he .
In the case of ether, market makers have accumulated long gamma positions in the ether (ETH) market, thus the risk of a gamma squeeze in Ethereum’s native token is relatively low.
“Since market makers have a large amount of positive gamma, their hedging will keep ETH relatively stable during settlement,” said Griffin Ardern, volatility trader at crypto asset management firm Blofin.
