How do market makers drive up BTC?

Author: Nan Zhi, Odaily* Star Daily*

Yesterday, Alex Thorn, the research director of crypto financial services company Galaxy Digital, posted on X platform: "As the spot price of BTC rises, options market makers are increasingly shorting Gamma. When you short Gamma and the spot price rises, you need to buy back the spot to maintain Delta neutrality. This should amplify the momentum of any recent short-term rallies."

This article will reveal what shorting Gamma means and how it contributes to the rise of BTC.

Note: Readers of this article should have a basic understanding of options; some conditions only provide conclusions without involving reasons and processes. If there is a deeper interest, you may explore further on your own.

Basic Concepts and Definitions

Gamma

Gamma: A measure of the sensitivity of an option's Delta; the larger the Gamma, the greater the rate of change of Delta.

Delta: A measure of the sensitivity of an option's price relative to the price of the underlying asset. For example, if the Delta of a certain BTC option is 0.6, then if BTC rises by 1 U, the option price will rise by 0.6.

When is Gamma positive: It is positive for buyers of call and put options, and negative for the corresponding sellers.

How to short Gamma: Selling options is equivalent to shorting Gamma.

Delta Neutral

Delta Neutral: If a portfolio consists of related financial products and its value is not affected by small price changes in the underlying asset, such a portfolio has the property of being Delta neutral.

Generally, market makers do not earn profits from price fluctuations but rather from spreads and fees; therefore, they usually need to keep their portfolios Delta neutral.

On the other hand, market makers often act as Makers and actively buy for trading due to market liquidity demands, which leads to changes in their Delta. Thus, market makers need to purchase another financial product as a hedge to maintain Delta neutrality.

Market Makers Supporting the Rise

Current Situation 1 - Spot Price Rise: The price of BTC has been rising continuously in recent days, with no significant pullbacks.

Current Situation 2 - Market Makers Shorting Gamma: First, Alex Thorn presented data: "Using Amberdata's data, we can calculate the positions of market makers. Our analysis shows that market makers are increasingly shorting Gamma, with an initial price of around $28,500 and above."

Demand: With Current Situation 1 combined with Current Situation 2, the price rise causes the Delta of market makers to no longer be neutral, and "more and more are shorting Gamma," thus creating a sustained demand for purchasing spot to achieve Delta neutrality.

Conclusion: Alex Thorn stated: "When the price reaches $32,500, market makers need to buy $20 million of Delta for every subsequent 1% increase."

Rising Gamma

The value of Gamma is usually influenced by the following situations, which may lead to an increase in Gamma:

Shortening of the remaining term: When the remaining term of the option becomes shorter.

Strike price close to the underlying asset price: When the strike price of the option is close to the market price of the underlying asset.

Increased volatility of the underlying asset price: High volatility typically leads to an increase in Gamma.

Alex Thorn stated: "As the spot price rises, market makers need to buy back more and more Bitcoin. If any short-term rise occurs, this should increase explosiveness." As the market rises, the amount needed for hedging also increases, further driving the market upward.

Market Makers Supporting Range

Additionally, Alex Thorn stated: "Market makers are long Gamma in the range of $26,750 to $28,250. When you are long Gamma and the spot price drops, you must also buy back the spot to maintain Delta neutrality. Therefore, as options market makers buy back Delta, any short-term downward price action will face resistance.

This is a good support for bulls because if the spot price rises moderately, short covering of Gamma may cause it to rise significantly, but if the price drops, long covering of Gamma may provide some support and limit recent declines."

This section is similar to the basic principles mentioned earlier. When market makers are long Gamma, a price drop will cause their Delta to decrease, thus requiring them to buy spot to increase Delta and maintain neutrality. The price proposed by Alex Thorn corresponds to a potential support range.

Conclusion

As co-founder of DWF Labs said, "When every piece of information is seen as a bullish signal, the market is bullish." The position of market makers may be a potential driving force for upward movement, but this article aims more to simply explain the impact of market maker positions on the market. Alex Thorn's views and price ranges are for analytical purposes only and are for readers' reference.