Bitcoin tanked on Wednesday, hitting multi-month lows near $46,000.
The episode shows how the growing trade in cryptocurrency options in recent months has become a force to reckon with for participants in the underlying spot market for bitcoin, with monthly expiries proving to be a catalyst for price volatility.
For example, if a trader wants to buy a bitcoin call at the strike of $80,000 right now, and there is no matching sell order, the market maker will step in and sell the $80,000 call, facilitating the transaction.
Gamma refers to the speed of change in delta – sensitivity of the option’s price to changes in the price of the underlying asset.
As bitcoin started falling, the negative gamma exposure became a pain: Puts sold at the aforementioned strikes began gaining value, signaling losses for the market makers.
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