Ether (ETH), the second-largest cryptocurrency by market value, has been largely locked in a narrow price range around $1,800 since mid-May, said Jeff Anderson, a senior trader at STS Digital. Market makers, the dealers tasked with providing liquidity to an exchange’s order book, are forced to hedge their options exposure through offsetting positions in the spot or futures market in order to run a market-neutral, or delta-neutral, portfolio. This so-called delta hedging action as the underlying asset moves can influence the spot market price and is known to arrest price swings.
Market makers are currently stuffed with what’s known as long gamma positions in the $1,800 strike price ether options due to expire on June 30. Being long gamma means holding a buy position in call or put options. This long gamma positioning forces market makers to snap up the underlying asset when the price falls below the said level to keep the overall portfolio market-neutral. Similarly, they sell the asset when the price rallies.
Griffin Ardern, a volatility trader from crypto asset management firm Blofin, said the delta hedging by market makers could strongly influence the spot price. Considering the lack of enthusiasm among futures and perpetual futures traders right now, the impact of market maker hedging could be significant, Ardern said.
The market makers’ delta hedging actions could keep the Ether price range locked around $1,800 in the short term. So, as we go higher, market makers will likely sell ETH. On the flip side, market makers would buy the cryptocurrency on price dips, Anderson said. So, the spot price could stay close to $1,800.