Ethereum
The Ethereum price may be struggling to clear the $3,400 resistance, but a gamma squeeze could cause ETH to surge to a new all-time high. Investment bank UBS has only recently started to give cryptocurrencies column space in their research reports. However, the bank may have just spotted something that suggests Ethereum may be about to pop.
A large volume of call options have been purchased way above the current price. Many bullish bets are predicting an Ethereum price of more than $8,000 by year-end. Furthermore, some suggest it may happen sometime next month. This is by no means a guarantee, but the tail often wags the dog and not the other way around. Large open positions in options sometimes act as a magnet for the price. As the market starts to move towards the ‘strike price’, the Gamma increases, which means the dealers who sold the options are forced to hedge their positions at an increasing rate. In the case of call options, shorts must hedge by buying the underlying, in this case, ETH.
In extreme cases, when open positions are large enough, this can create what’s known as a gamma squeeze. Options traders have long been aware of the effect extreme Gamma can have on an asset. However, due to this year’s infamous GameStop and AMC short-squeezes, the term is also a hot topic amongst retail traders.
The below chart, published on Zerohedge, shows the number of call options (bullish wagers) far outweighs the number of puts (bearish). Furthermore, the highest concentration is at the $6,000 strike price. Although we don’t see how much was paid for the options, it is safe to assume the premium would be hefty given the high volatility. Therefore for these trades to be profitable, the Ethereum price would need to be substantially higher than $6,000.
Of course, ETH still has to do a lot of work before options shorts start to get sweaty palms. Although in this case, higher prices could lead to even higher prices if short-covering triggers more of the same. This could create a shock higher to the strike with the highest open position.
However, if that happens, as we saw with GameStop earlier this year, it can lead to a vacuum below. As the price turns lower, the dealers no longer need the same quantity of underlying to hedge their position. This can lead to a sharp reversal as previous buyers turn sellers.
For now, there is no immediate sign that a gamma -squeeze is imminent. Although, it will be interesting to see what happens if the Ethereum price breaks above $3,400. I guess that dealers will go early, buying ETH ahead of the strike.
As long as ETH stays above $3,000, there is a chance it can go much higher. Although, if the price drops below the psychological support, the option shorts can breathe a sigh of relief….for a while.
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