Crypto Options Market Makers Begin To Influence Bitcoin Price
Bitcoin (BTC) fell on Wednesday, hitting multi-month lows near $ 46,000 as fears of an anticipated Federal Reserve rate hike, the recent gloomy mood in financial markets and Tesla’s decision to suspend bitcoin payments were all blamed for the slide.
But the downtrend was likely made worse by options market makers selling the cryptocurrency on the spot / futures market to hedge their books (offset bullish exposure), according to Fredrick Collins, an options trader. senior and researcher at Glassnode.
“The market makers were very short puts in the range of $ 52,000 to $ 50,000, and I estimate they were forced to sell nearly 2,900 bitcoins during the crash to compensate for the short gamma exposure. Collins told CoinDesk in a conversation on Twitter. “It probably exacerbated the bearish movement.”
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The episode shows how the growing trading of cryptocurrency options over the past few months has become a force to be reckoned with for participants in the underlying bitcoin spot market, with monthly maturities proving to be a catalyst for price volatility. According to data source Skew, the options market has exploded over the past 12 months, with open interest rising from $ 50 million to over $ 10 billion.
Option market makers are individuals or entities with a contractual obligation to maintain a healthy level of liquidity on an exchange. They make sure there is enough depth in the order book by offering to buy or sell a call / put option contract at any given time.
For example, if a trader wants to buy a bitcoin call at the strike price of $ 80,000 right now, and there is no corresponding sell order, the market maker will step in to sell the $ 80,000 call, thus facilitating the transaction. A call option gives the holder the right but not the obligation to buy the underlying asset at a predetermined price on or before a specific date, called expiration. A put option gives the right to sell.
Thus, market makers always take the opposite side of investor transactions and maintain a market neutral portfolio by buying and selling the underlying asset as prices move. This act of balancing the books is known as “gamma hedging” in options parlance.
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Gamma refers to the rate of change of the delta – the sensitivity of the option price to changes in the price of the underlying asset. In other words, gamma measures the rate of change in the option price relative to changes in spot market prices.
Holding a long sell position is considered a long (positive) gamma trade, as the option begins to appreciate in value at a faster rate as the price of the underlying asset falls, resulting in earns money for the buyer and generates a loss for the seller (holder of a short gamma position).
According to Collins, market makers were short of gamma (put option sellers) at $ 52,000- $ 50,000 on Wednesday. As bitcoin began to decline, negative gamma exposure became distressing: options sold in the aforementioned strikes began to rise in value, signaling losses for market makers. So, market makers responded by selling bitcoins on the spot / futures market.
Data provided by Collins shows that the estimated dealer inventory fell by 2,900 BTC as bitcoin prices fell. The inventory estimate represents the number of bitcoins bypassed in the spot and futures market. (A BTC futures contract represents a coin on the major exchanges. The Chicago Mercantile Exchange contract size is 5.)
Greg Magadini, CEO and co-founder of the options analysis platform Genesis Volatility, agreed with Collins’ theory, saying in a Telegram conversation that many traders were holding long positions or bearish bets at 50,000. $ and $ 48,000.
The theory can be debated on the grounds that selling 2,900 BTC worth $ 145 million at the current price of around $ 50,000 is too small a transaction to have a significant bearish impact on the cryptocurrency with a market capitalization of $ 1 trillion.
Nonetheless, the fact that traders and analysts are starting to assess the hedging activity of cryptocurrency options market makers reflects the growing relevance of the derivatives segment to the bitcoin market.
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