Opinion: Rising Ethereum Price May Cause Gamma Squeeze In Options Market

Recent growth in the Ethereum rate has led to an increase in the number of holders of losing positions in the options market. This, in turn, may become a factor in the further rise in the price of cryptocurrency, says Pankaj Balani, CEO of Delta Exchange.

In a conversation with Cointelegraph Balani said that he had observed an increase in the number of uncovered call options with strike prices in the range of $ 2000 – 3000, are far from profitable performance for their customers.

“As the rate rises, short positions on call options lead to large unrealized losses, forcing option sellers to buy more ETH to cover their short gamma risks,” he added.

The CEO noted that traders were selling call options with strike prices of $ 2,000 or more in December and January, assuming that ETH would not rise as quickly and the options would be settled without payment. “There is a possibility that these sold options will not be settled without payment,” he said.

If the described scenario is fulfilled, the rate of ETH rise may increase due to option sellers who will have to buy cryptocurrency in order to pay off buyers. A similar situation occurred last week in the GameStop stock market. However, Balani argues that the example of ETH is somewhat different, as its rise is not driven by the sole desire of traders to move the price up.

The price of ETH on Wednesday renewed its all-time high around $ 1,700 and is close to it at the time of publication.

Digital asset management company Grayscale Investments previously submitted its own report , in which its analysts expressed the opinion that the implementation of the Ethereum EIP-1559 improvement proposal will help create positive pressure on the price of the cryptocurrency. EIP-1559 implies the introduction of a mechanism for burning ETH collected as fees. According to Grayscale, the EIP-1559 will make ether a “commodity,” rather than the “medium of exchange” it is today.

EIP-1559 was proposed by Vitalik Buterin and Eric Korner in April 2019 and aims to change the model of using fees in the cryptocurrency network. As expected, this approach is not supported by miners, but the developers admit that EIP-1559 can be implemented before the end of this year.

“If activity increases and ether supply decreases due to incineration, the supply-demand curve will indicate an increase in the cost of ether as each unit will have to satisfy a larger share of economic activity,” writes Grayscale. “If EIP-1559 is implemented, it will create a consumption mechanism that will create a positive feedback loop for the price of ether.”

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