Options are derivative contracts, offering the purchaser the right but not the obligation to buy or sell the underlying asset at a preset price at a later date. A call or a bullish bet gives the right to buy, while a put confers the right to sell.

The demand for higher strike price call options has recently increased, with bitcoin rallying nearly 27% in the past four weeks. That has left market makers with a significant net short gamma exposure above $36,000, according to data tracked by Amberdata and Galaxy Digital. Options gamma is the rate that delta will change based on a $1 change in bitcoin’s price. Delta measures the sensitivity of options prices to the change in bitcoin's price.

When market makers or dealers are net short gamma, they buy the underlying asset in the spot market as its value increases to stick to their mandate of maintaining an overall delta or market-neutral exposure. The hedging activity often accelerates the rally, often called a “gamma squeeze,” and likely played a role in BTC’s recent quick ascent from $30,000 to $35,000.

“If BTCUSD moves higher to $35,750-$36,000, options dealers will need to buy $20 million in spot BTC for every 1% upside move, which could cause explosiveness if we begin to move up towards those levels,” Alex Thorn, head of firmwide research at Galaxy Digital, said on X.

Dealers or market makers are entities tasked with creating order book liquidity and are always on the opposite side of investors’ trades. They make money through the bid-ask spread and always strive to maintain a direction-neutral portfolio.

The present positioning of market makers and its expected impact on the spot price contrasts the situation early this year when market makers were net long gamma and bought low and sold high in the spot/futures market to keep their books neutral. That further added to the volatility lull in the market.

Analysis Bitcoin Markets Options

Omkar Godbole

Omkar Godbole is a Co-Managing Editor on CoinDesk's Markets team based in Mumbai, holds a masters degree in Finance and a Chartered Market Technician (CMT) member. Omkar previously worked at FXStreet, writing research on currency markets and as fundamental analyst at currency and commodities desk at Mumbai-based brokerage houses. Omkar holds small amounts of bitcoin, ether, BitTorrent, tron and dot.