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The crypto market was rejuvenated with a bullish frenzy last week as bitcoin (BTC), the frontrunner in the world of cryptocurrencies, skyrocketed by more than 15% in its most remarkable performance since March. Now, a momentous event looms on the horizon, heightening the excitement and anticipation in the industry.
On Friday, at 08:00 UTC, the Deribit exchange based in Panama, which holds more than 85% of the global options market, will witness the expiration of a significant number of cryptocurrency contracts. The expiring contracts include approximately 150,633 bitcoin options contracts with a total value of $4.57 billion, along with 1.23 million ether contracts valued at $2.3 billion. These bitcoin contracts set for settlement represent 43% of the overall open interest, as reported by Amberdata.
In the case of Bitcoin, investors have recently been purchasing call options with strike prices at $30,000 and higher. Consequently, this particular level has garnered the highest open interest, indicating the number of active contracts. Market makers and dealers, responsible for providing liquidity through the creation of an order book, have taken the opposite side of the investors' trades, thereby accumulating a considerable amount of exposure in terms of "negative (short) gamma."
Options are financial contracts derived from underlying assets, granting the buyer the right to either purchase or sell the asset at a predetermined price on a future date. A call option provides the buyer with the right to buy the asset, representing a bullish position, while a put option grants the right to sell the asset, representing a bearish position. Having a "short (negative) gamma" position refers to holding a sell position in either call or put options.
The significant accumulation of open interest at the $30,000 level suggests that the spot price may converge towards that threshold as the expiration date approaches. As per CoinCryptoUs data, Bitcoin is presently trading slightly above $30,000.
In the meantime, the negative gamma positioning of dealers implies that even a small deviation from the $30,000 mark could potentially trigger a significant surge or decline in prices. This is because dealers, with a net-negative gamma exposure, tend to "buy high and sell low" as the underlying asset gains bullish or bearish momentum, aiming to maintain a neutral market exposure.
To put it differently, as the expiry date draws near, if bitcoin gains momentum and surpasses $30,000, dealers will purchase the cryptocurrency in both the spot and futures markets. Consequently, this could trigger an amplified price surge known as a gamma squeeze or a sling-shot effect. Conversely, if the price drops below $30,000, dealers will be compelled to sell.
"This [bullish] flow is heavily impacting dealers' positioning, and ahead of Friday's expiration, we expect a historic record (since we started tracking) of negative gamma," Greg Magadini, director of derivatives at Amberdata, said in the latest edition of the weekly newsletter. "With only a little spot move, we could witness fireworks."
Options gamma measures the speed at which delta, representing the sensitivity of options to changes in the underlying asset's price, changes. It indicates how the directional risk exposure of options fluctuates with movements in the underlying asset and increases as the expiry date approaches.
Market makers play a crucial role in maintaining liquidity in the order book and generate profits by consistently managing their gamma exposure to ensure the neutrality of the book's direction, or delta, and capitalize on the bid-ask spread.
A large negative gamma is seen at the $30,000 strike options expiring on June 30. (Amberdata)
Crypto derivatives trader Christopher Newhouse believes that the potential impact of dealer hedging this time around could be more significant than usual.
"With several of the topside call strikes set to expire this week in large size and gamma concentrated around the $30,000 [level] and bitcoin trading near $30,000, dealer hedging flows as we approach expiry may have more of an exaggerated impact on spot prices than some of the smaller weekly expiries – especially as price coils near previous highs and potential short liquidation levels," Newhouse told.
"By strike, the $30,000, $35,000 and $40,000 strikes are some of the most popular call strike targets with many of these bets being taken only a few days prior as bullish exuberance starts to overwhelm some of the short-term market flows," he said.
In the case of ether, market makers have built up substantial long gamma positions in the ether (ETH) market, thereby reducing the likelihood of a gamma squeeze in Ethereum's native token.
"Since market makers hold a large amount of positive gamma, their hedging will keep ETH relatively stable during settlement," Griffin Ardern, volatility trader from crypto asset management firm Blofin, said.
