What You Should Know:

• BTC options market makers may create market volatility as prices near $90,000.
• This price point remains crucial after the recent quarterly settlement.

As Bitcoin’s recovery continues, the $90,000 mark is anticipated to be a pivotal point for market dynamics. This assessment largely derives from the current positioning of options market makers. Market makers, sometimes referred to as dealers or MMs, are responsible for providing liquidity within an order book. They trade on the opposite side of investors and maintain market-neutral exposure by hedging through various markets. Their profit arises from the difference between what they acquire assets for and their selling prices, known as the bid-ask spread.

Data from Deribit on Bitcoin options indicates that market makers are “short gamma” at the $90,000 strike price. This implies that as Bitcoin’s price approaches this level, market makers will need to sell when the price drops and buy when it climbs to keep their positions neutral, adding to potential market volatility.

“With negative gamma continuing to impact the market post-settlement, market makers’ hedging strategies may further increase price variability,” stated Griffin Ardern, chief author at BloFin Academy. “However, there seems to be a higher likelihood of upward movement for the price at this time.”

Understanding gamma involves recognizing how it measures the changes in delta, which gauges the sensitivity of an option’s price relative to its underlying asset. Being short gamma implies a position that could incur losses amid high volatility. When market makers hold a short gamma, they must align their trading with market trends to maintain a balanced exposure.

In stark contrast, a long gamma position would reflect a more stable approach. Previously, toward the end of last year, market makers were long gamma at $90,000 and $100,000, resulting in market consolidation within those limits.

The image below illustrates dealer gamma distribution across expiration strikes, highlighting that the $90,000 strike will likely remain the most negative following the upcoming quarterly settlement. This indicates that the actions of dealers might contribute to significant volatility around the $90,000 mark.

Ardern further noted that the gamma profile for BTC post-expiration will bear similarities to the gold-backed PAXG token: “Post-removing the settling options impact, PAXG exhibits a comparable GEX distribution to BTC, showcasing price support following declines and resistance during robust climbs.”

Dealer gamma distribution in Deribit's BTC options. (Amberdata)