As Bitcoin (BTC) breaks above $36,000, options market makers’ recent posture indicates that it may witness strong price increases.
Derivative contracts, such as options, provide the buyer the option—but not the obligation—to acquire or sell the underlying asset at a predetermined price at a later time. The right to purchase is granted by a call or bullish bet, whilst the right to sell is granted by a put.
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Given that bitcoin has gained around 27% over the last four weeks, there has been a sudden spike in demand for call options with higher strike prices.
Is Bitcoin Set to Go Crazy? Options Data Offers Clues Beyond $36K,Is Bitcoin Set to Go Crazy? Options Data Offers Clues Beyond $36K
Market makers now have a large net short gamma exposure above $36,000, based on data that is monitored by both Amberdata and Galaxy Digital. Options gamma is the rate at which delta will fluctuate in response to a $1 change in the price of bitcoin. The sensitivity of options pricing to changes in the price of bitcoin is measured by delta.
In order to fulfil their duty of maintaining an overall delta or market-neutral exposure, market makers or dealers who are net short gamma purchase the underlying asset in the spot market when its value rises.
Hedging frequently speeds up the rally, which is referred to as a “gamma squeeze,” and it is possible that this contributed to Bitcoin’s recent sharp rise from $30,000 to $35,000.
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Alex Thorn, head of firmwide research at Galaxy Digital, stated on X that “if BTCUSD moves higher to $35,750-$36,000, options dealers will need to buy $20 million in spot BTC for every 1% upside move, which could cause explosiveness if we begin to move up towards those levels.”
Creating order book liquidity is the responsibility of dealers, also known as market makers, who are always on the other side of investor trades. The bid-ask spread is how they generate revenue, and they constantly work to keep their portfolio direction-neutral.
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