Learn Concept: Bitcoin Options and Gamma Pinning

By: Eva Baxter

Bitcoin's recent surge past $123,000 has generated notable interest in Bitcoin's derivatives market, particularly options trading. An intriguing advanced concept relevant to this situation is "Gamma Pinning." In the context of Bitcoin options, gamma pinning refers to the effect that large amounts of options have on an underlying asset’s price as the options approach expiration.

In Bitcoin options trading, the gamma of an option measures the rate of change of its delta. Delta, meanwhile, represents the sensitivity of the option's price to changes in the price of the underlying asset. As options near their expiration date, many traders hedge their positions by buying or selling the underlying Bitcoin, depending on whether they are holding calls or puts. This hedging activity can significantly impact Bitcoin's price, especially when options are at strike prices that have amassed considerable open interest. At these strikes, the gamma peaks, leading to efforts to maintain Bitcoin's price around these levels, known as gamma pinning.

Such a phenomenon was observed recently on Deribit, where large open interest was seen at $120,000 and $130,000 strikes, causing Bitcoin's price to oscillate within this narrow range. If traders hedge aggressively as expiration approaches, the resultant spot buying or selling pressure can constrain price movements, pinning Bitcoin within this range. This effect highlights the impact of options market dynamics on spot prices.

Understanding these complex derivatives interactions, including gamma, delta, and the hedging activities surrounding expiry dates, is essential for traders navigating the crypto markets. It informs strategies that combine technical indicators with derivatives data to forecast potential price movements and market sentiment.

For more insights into Bitcoin's market dynamics and derivatives impact, further article readings can be explored here.