Ether Prices to Stabilize as Options Market Makers Hedge Their Books, Analyst Says

Ether ETH$3 034,52 has dropped 2% this week, establishing a foothold under the crucial support of the 200-week simple moving average at $1,660.

In the next few days, prices may remain steady owing to hedging activity of options market makers or dealers, who are likely to buy low and sell high in the spot market, arresting the price volatility.

A market maker or a dealer is a market participant posting both a bid and ask in a market to provide liquidity at all times. These entities make money from the bid-ask spread and agnostic to price action. They run a direction-neutral (delta neutral) book, which mandates constant buying and selling of the underlying asset to limit the exposure to price gyrations.

"Dealers predominantly hold long [gamma] positions for the $1,650-$1,700 strikes, both for 22nd and 29th September [expiries]," Options Insights founder Imran Lakha said in a blog post at Deribit.

"The magnitude of these positions is consequential enough to influence market dynamics. Consequently, it could constrain Ethereum’s mobility leading up to the 29th September expiry, especially on the bullish side," Lakha added.

Gamma refers to the rate of change of delta or sensitive of option's price to changes in the underlying asset. The nature of market makers' hedging activity depends on their gamma exposure.

When market makers and dealers are net long gamma, they keep their overall market exposure neutral by selling high and buying low.

In other words, they are buyers of the underlying asset when the market drops and sellers when the market rallies. That, in turn, adds liquidity to the market and reduces price gyrations. As such, markets often gravitate toward levels where the positive dealer gamma exposure is significant.

The gamma increases significantly as expiry nears, warranting more hedging by dealers with net positive gamma exposure, which further dampens price volatility.

Deribit, the world's largest crypto options exchange, will settle ether options worth over $1.7 billion next Friday at 08:00 UTC.