As bitcoin’s (BTC) recovery gains traction, the $90,000 mark has emerged as a crucial level where market dynamics could get intriguing. This assessment largely stems from the current activities of options market makers.
Market makers, often referred to as dealers or MMs, play a vital role in ensuring market liquidity. They take positions opposite to those of investors and strive to maintain a neutral market stance by hedging in both spot and futures markets. Their profits come from the variation between the buying price and the selling price of an asset, known as the bid-ask spread.
Data from bitcoin options on Deribit reveals that market makers are currently “short gamma” at the $90,000 strike price. This indicates that as bitcoin approaches this level, market makers will be compelled to sell when the price declines and buy when it increases in order to sustain a neutral position. Such hedging strategies could lead to increased market volatility.
“Given that negative gamma will continue to significantly influence the market after settlement, the hedging activities of market makers could amplify price swings,” noted an expert from BloFin Academy. “However, the outlook for upward price movement appears to be more favorable at this moment.”
Gamma measures the rate of change in delta, which itself indicates how sensitive an option’s price is to fluctuations in the underlying asset’s price. Being short gamma means holding a short position in options, which can result in financial losses, especially in volatile conditions. Consequently, when market makers are short gamma, they are required to trade in alignment with market movements to keep a market-neutral book.
Conversely, when market makers are long gamma, different dynamics unfold. At the close of the previous year, they held long gamma positions at both the $90,000 and $100,000 strike prices, leading to consolidation in these regions.
The accompanying chart illustrates gamma levels at various strike prices and expiration times, showing that the $90,000 strike is set to remain the one with the most negative delta following the quarterly settlement occurring this Friday.
To put it simply, the hedging strategies employed by dealers could lead to significant market fluctuations around the $90,000 level.
The gamma profile of BTC after Friday’s expiration is expected to mirror that of the gold-backed PAXG token. “When the effects of options nearing settlement are removed, PAXG reveals a GEX distribution similar to BTC. It tends to find support after substantial price drops and faces resistance during significant rises, resulting in a broad range of price variations,” the expert remarked.