Bitcoin’s Recovery Rally and Market Maker Dynamics
As bitcoin’s (BTC) recovery rally continues, $90,000 emerges as a key level for potential market movements, influenced primarily by the positioning of options market makers.
Role of Market Makers
Market makers, also known as dealers or MMs, provide liquidity to the order book by occupying the opposite side of investors’ trades. They maintain a market-neutral exposure through hedging in spot and futures markets. Their profit comes from the bid-ask spread—the difference between purchase and sale prices of assets.
Current Market Dynamics
Data from Deribit bitcoin options shows that market makers are “short gamma” at the $90,000 strike. This means that as bitcoin price approaches this level, market makers must sell when prices decline and buy when they increase, to maintain neutrality. Such hedging actions may lead to heightened market volatility.
Griffin Ardern, chief author at BloFin Academy, stated, “Considering that negative gamma will still significantly impact the market after settlement, the hedging behavior of MMs may further promote price fluctuations. However, the possibility of upward price movement seems greater for now.”
Understanding Gamma and Its Implications
Gamma measures changes in delta, which gauges how an option’s price reacts to shifts in the underlying asset’s price. Holding a short gamma position can lead to losses, particularly in volatile conditions, compelling market makers to actively trade to maintain market neutrality.
In a contrasting scenario, when market makers are long gamma, they can stabilize prices. Notably, at the end of last year, they held long gamma positions at both $90,000 and $100,000, promoting price consolidation.
Future Expectations
The current situation shows that the $90,000 strike will maintain the most negative delta after the upcoming quarterly settlement. Dealer hedging is likely to amplify market swings around this critical price point.
Ardern noted that the dealer gamma profile post-expiration could resemble that of the gold-backed PAXG token, which shows similar fluctuations: price declines are followed by support, and significant rises face resistance, indicating a wide range of price movements.
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