“The market is selling short-term options ether gamma, meaning a sharp move in either direction could be amplified,” QCP Capital analysts said.
Crypto derivatives trader Gordon Grant discovered similar conditions. He recently witnessed a sharp increase in short-term volatility as Ethereum experienced a more severe sell-off than Bitcoin.
“You can see the material differences between Ether and Bitcoin. The term structure remains sharply inverted with the kink showing the demand for gamma and the premium for ether gamma to Bitcoin and the premium for ether gamma to ether vega. It works,” Grant told The Block.
Gamma represents the rate of change between an option’s implied position and the price of the underlying asset. A higher gamma means that there will be more change as the price of that particular asset changes. Meanwhile, vega is the change in option value due to changes in implied volatility.
More traders are purchasing short-term put options before expiration. According to Deribit Ethereum options open interest data, the current put-call ratio for upcoming expirations is high at 1.04, especially for this Thursday’s expiration. A put-call ratio above 1.0 indicates a bias toward puts, indicating bearish sentiment in the market.
A call option gives the owner the right, but not the obligation, to purchase the underlying asset and is therefore a bullish bet on that asset. Puts, on the other hand, give the owner the right to sell the asset and are a bearish bet.
Put options provide gamma to these traders because as the price of Ether falls, the delta of the option decreases, allowing them to profit if the price falls.
Ether experiencing short-term negative emotions
QCP Capital analysts pointed out that indicators of Ethereum risk reversal trading suggest very pessimistic expectations about Ethereum price movements in the near future. “The Ethereum risk reversal turned very negative at -12%, indicating uneasy sentiment,” QCP Capital analysts added.
Risk reversal trading is a complex strategy used by traders to take a position on the price direction of an asset while managing the risk of adverse price movements.
The analysts added that due in part to macroeconomic conditions, cryptocurrency markets are becoming “increasingly volatile as the downside distortion of Ethereum’s risk reversal deepens.” “We expect this anxiety to persist as the Iran-Israel conflict intensifies,” QCP Capital analysts said, adding, “Risk aversion has been further exacerbated by weakness in U.S. stocks.”
According to The Block’s pricing page, Ethereum is down about 3.4% over the past 24 hours and is trading at $3,073 at 10:31 a.m. ET.
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