ETH price surge could cause ‘gamma squeeze’ as bull market heats up: Delta Exchange exec

Delta Exchange, a crypto derivatives platform, says many options traders didn’t expect Ethereum’s price to rise so quickly. Now, they’re sitting on huge unrealized losses.

A growing number of options traders are sitting on large unrealized losses following Ethereum’s (ETH) latest price surge, highlighting once again the volatile and unpredictable nature of the cryptocurrency market. 

Pankaj Balani, the CEO of Delta Exchange, a St. Vincent-based cryptocurrency derivatives platform, tells Cointelegraph that he has observed “a lot of naked call writing activity in ETH for deep out of the money call options all the way up to $2,000 and $3,000 strikes.”

A call option becomes deep out of the money if its strike price is significantly above the current price of an underlying asset – in this case, Ethereum.

Balani said:

“As price surges, short call options positions are resulting in heavy unrealized losses, forcing option writers to buy more ETH in order to cover their short gamma exposure.”

Balani said traders sold call options of strikes $2,000 and higher in December and January thinking Ethereum’s price will not appreciate as quickly and that their options would expire worthless.

“There is a chance that those sold options will not expire worthless,” he said.

As Ethereum moves higher, this scenario will only intensify, forcing additional buying activity. In the options market, this feedback loop is referred to as a gamma squeeze.

Delta Exchange generated over $56 million in trade volumes on Thursday, according to industry data. 

When asked whether ETH sellers could experience a GameStop-like gamma squeeze, Delta said the two scenarios aren’t exactly alike because GME’s rise was associated with orchestrated buys. Ethereum, on the other hand, doesn’t seem to have orchestrated buying activity.

Ether crossed $1,650 on Wednesday, en route to new all-time highs. The rally appears to be a continuation of the bull market that began last year as Ethereum, Bitcoin (BTC) and the wider cryptocurrency market rallied.

Ethereum is also benefiting from the DeFi boom, with several high-profile projects building on top of the developer network. More than $32 billion has been locked into the DeFi market, according to the latest industry data.