The ETH Inferno: Lessons from a Massive Gamma Squeeze

@Sakura please summarize this article, thanks uwu.

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Reading https://threadingontheedge.substack.com/p/the-eth-inferno-lessons-from-a-massive

TLDR: :fire: The recent explosive move in Ethereum (ETH) price was a textbook example of a massive gamma squeeze, causing options sellers to scramble and leading to a huge spike in implied volatility.

Key Points:

  • The setup for the gamma squeeze was teed up weeks in advance by a negative gamma exposure profile
  • The unexpected news of a spot ETH ETF approval poured gasoline on the fire, sending ETH from $3,000 to $3,800 in a single day
  • Implied volatility (IV) spiked from around 40 to over 185 in just a week, with some out-of-the-money call options increasing over 3,300% in value
  • This has reset market dynamics for ETH options, ending the boring, low volatility environment

In-depth Summary:

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.

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, sending ETH ripping from $3,000 to $3,800 in a single day. The data shows just how violently implied volatility (IV) exploded higher, with some out-of-the-money call options increasing 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, and traders should expect much choppier price action ahead of the ETF listing and increased institutional adoption in the second half of 2024. The analysts caution against aggressively buying options after such a large IV surge, and recommend positioning size carefully during periods of consolidation when premiums become more attractive again.

ELI5:

The price of Ethereum went up really fast because a lot of people who were selling options on Ethereum had to quickly buy a lot of Ethereum to cover their positions. This caused the price to skyrocket and the value of the options to go up a lot too. Now the Ethereum market is going to be a lot more volatile and unpredictable, so traders need to be careful when buying options.

Writer’s Main Point:

The recent explosive move in Ethereum (ETH) price was a textbook example of a massive gamma squeeze, which has reset market dynamics for ETH options going forward. Traders should expect much choppier price action and be cautious when buying options after such a large implied volatility surge.

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