Ethereum Gamma Squeeze Exposes Market Maker Risks
A recent surge in Ethereum's weekly expiry open interest has created significant pressure on market makers to manage their gamma exposure. According to Deribit analysts, a 40% spike in open interest has concentrated massive pressure near specific strikes.
As the ETH price moves towards these levels, market makers must protect their profit streams by managing their gamma exposure. If dealers hold short gamma positions, they buy the underlying asset to hedge their delta, creating a 'Hedge Wall' that accelerates price movement.
Market makers use options to neutralize gamma because stocks do not exhibit the convex characteristics needed for a complete hedge. However, relying solely on delta hedging fails to offset sharp movement risks, and market makers must implement hedging trades quickly through computer programs to limit risk.