The ETH gamma inferno incinerated option sellers.
Negative gamma exposed them to an explosive move.
The ETF approval lit the fuse, causing IV to 5x in a week. Some OTM calls +3,300%.
$3500 level held, low-vol ETH regime is dead - get ready for chop. 🔥
The recent explosive move in Ethereum (ETH) price was a textbook example of a massive gamma squeeze unfolding.
The setup was teed up weeks in advance by a negative gamma exposure profile that signaled options sellers would have to aggressively buy and hedge if ETH broke above key resistance levels.
According to analysis from Ben Lilly and the team at Jlabs Digital, all the indicators were flashing green lights to buy long-dated, out-of-the-money ETH call options a couple weeks ago despite the prevailing negative sentiment. The risk-reward was seen as highly favorable.
When the unexpected news of a spot ETH ETF approval hit, it poured gasoline on the fire. The gamma squeeze kicked into overdrive as options sellers scrambled to hedge their short exposure.
This sent ETH ripping from $3,000 to $3,800 in a single day.
The data shows just how violently implied volatility (IV) exploded higher. For the May 24th expiry contracts, IV spiked from around 40 to over 185 in just a week as sellers paid up massively to buy back their positions. Some out-of-the-money call options increased over 3,300% in value in a matter of days.
This has completely reset market dynamics for ETH options going forward. The boring, low volatility environment is over. Traders should expect much choppier price action ahead of the ETF listing and increased institutional adoption in the second half of 2024.
While the overall environment is increasingly bullish, the analysts caution against aggressively buying options after such a large IV surge. Look to position size carefully during periods of consolidation when premiums become more attractive again. Don't chase, be patient, and you'll be rewarded when the next wave higher inevitably comes
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