Last week, the bullish vibe returned to the cryptocurrency market as bitcoin (BTC), which is the most valuable cryptocurrency by market capitalization, rose more than 15%. This was its best performance since march. A significant event is on the horizon.

Deribit, a Panama-based exchange that controls 85% of global options trading, will expire 150,633 Bitcoin options contracts worth $4.57 Billion and 1,23 million Ether contracts valued at $2.3 Billion on Friday, 08:00 UTC. According to Amberdata, the bitcoin contracts that are due for settlement represent 43% of total open interest.

Investors have purchased call option with strike prices above and below $30,000. The level with the most open interest, or active contracts, is the one where investors have recently bought call options at strike prices above $30,000. Market makers and dealers, who create liquidity in the order book by taking the opposite side of investors’ trades hold significant “negative” (short gamma) exposure.

Options are derivative contracts which give the buyer the right to purchase or sell an asset for a set price at a future date. Calls confer the right of purchase, which is a bullish situation, while puts confer the right of sale, which is a bearish one. Short (negative) Gamma is holding a sell or short position in call or put options.

In the run-up to expiry, the large amount of open interest at $30 000 could cause the spot price to gravitate towards that level. According to CoinDesk, Bitcoin is trading at just over $30,000.

Dealers’ negative gamma positions mean that a slight shift away from $30,000 can translate into a price rally or slide. Dealers who hold net-negative gamma positions “buy high and then sell low” if the underlying gains a bullish, or bearish, momentum to maintain neutral exposure.

Dealers will purchase bitcoin in both the spot and futures market if the price of bitcoin rises above $30,000 before expiry. This could then lead to a price rally that is exaggerated, also known as a gamma-squeeze or slingshot effect. Dealers will also be forced to sell if the price falls below $30,000.

Greg Magadini said that “this [bullish] trend is affecting dealers’ positions, and we expect to see a record-breaking negative gamma (since we began tracking) before Friday’s expiration,” Greg Magadini stated in the most recent edition of Amberdata’s weekly newsletter. “With just a small spot movement, we could see fireworks.”

Options gamma represents the rate of change of delta, which is the level of sensitivity of the options to changes in the price of the underlying asset. Gamma is a measure of how the risk exposure to the direction changes as the price of the underlying asset fluctuates. It increases with expiry.

Market makers profit from the spread between the bid and ask by hedging their exposure to gamma to maintain the direction of the order book, or delta.

The $30,000 strike option expiring June 30 has a large negative gamma. (Amberdata)

Christopher Newhouse, a crypto derivatives trader, says that the impact of possible dealer hedging may be greater than usual.

Newhouse, a CoinDesk analyst, said that the hedging flows of dealers as we near expiry could have a greater impact on spot price than smaller weekly expiries. This is because the topside calls are concentrated at $30,000 and the bitcoin trades around $30,000.

He said that the strike prices of $30,000, $35,500, and $40,000 are among the most popular targets for call strikes. Many of these bets were placed only a few weeks before, as the bullish exuberance began to overpower some short-term market movements.

Market makers have accumulated a large number of long gamma position in the ether market (ETH), and the risk of a gamma pinch in Ethereum’s native coin is therefore relatively low.

Griffin Ardern is a volatility trader at crypto asset management company Blofin. He said: “Since the market makers have a lot of positive gamma in their portfolio, they will be hedging ETH to keep it relatively stable when settlement occurs.”

Sheldon Reback is the editor.