As bitcoin’s (BTC) recovery continues, the $90,000 mark emerges as a pivotal level where notable developments could occur. This forecast primarily stems from the current strategies of options market makers.
Market makers, referred to as dealers or MMs, play a crucial role by supplying liquidity within the order book. They take positions opposite to investors’ trades, aiming to maintain a market-neutral exposure through hedging activities in both spot and futures markets. Their profit comes from the difference between the purchase price of an asset and its selling price, known as the bid-ask spread.
Data from Deribit regarding bitcoin options, as analyzed by Amberdata, indicates that market makers are ‘short gamma’ at the $90,000 strike. This situation means that as the bitcoin price approaches this threshold, market makers will need to sell when the spot price decreases and buy when it increases to sustain a market-neutral stance. Such hedging actions could increase market volatility.
“Given that negative gamma will still have a significant impact on the market after settlement, the hedging behavior of market makers may further amplify price fluctuations,” stated Griffin Ardern, chief author of BloFin Academy and head of BloFin Research and Options, in an interview with CoinDesk. “However, the likelihood of upward price movement appears to be greater at this moment.”
Gamma measures the rate at which delta changes, with delta itself representing the sensitivity of an option’s price to shifts in the underlying asset’s price. Holding a short gamma position can result in financial losses, particularly during periods of heightened volatility. Thus, when market makers are short gamma, they are compelled to trade in the direction of the market to keep their portfolios neutral.
In contrast, when market makers are long gamma, the scenario alters. At the end of last year, market makers were long gamma at both the $90,000 and $100,000 levels, which contributed to a consolidation phase between these prices.
The chart illustrates gamma levels at various strike prices across expirations. It is evident that the $90,000 strike will likely remain the one featuring the most negative delta following the quarterly settlement scheduled for this Friday.
In simpler terms, the hedging actions of dealers could contribute to increased market swings around the $90,000 mark.
Ardern noted that the dealer gamma profile of BTC after Friday’s expiration will mirror that of the gold-backed PAXG token.
“Once the effect of options nearing settlement is eliminated, PAXG will exhibit a GEX distribution akin to BTC. It gains support following significant price declines and faces resistance during substantial price rises, indicating a broad range of fluctuations,” Ardern explained.
