September 25, 2023
Paradigm TBP Episode | Breaking Down Net Dealer Gamma with Co-Host, Greg Magadini, Director of Derivatives at Amberdata on September 19th, 2023
In this episode, they step into various facets of Options trading and market dynamics. It begins with an intro, teases an upcoming Bybit trading fee discount, and introduces Fabio, an Options data expert. The episode also goes into net gamma rebalancing, exploring trading strategies and risk management in crypto options. It spotlights $ETH and $BTC, discussing dealer profiles, gamma price changes, and cumulative Deribit funding data analysis.
Introduction
In this episode of "The Big Picture," hosted by Joe Kruy, alongside Greg Magadini and Marty, the team welcomes Fabio Bassani aka Gravity5ucks on Twitter (X), a data scientist and options trader. Where they dive into the crypto market, options trading, and the intriguing dynamics that have been unfolding in recent months.
Announcement: Bybit Trading Fee Discount
The episode begins with an announcement regarding a trading fee discount partnership between Paradigm and Bybit, aiming to provide significant fee reductions for traders completing a Bybit options trade via Paradigm. This initiative highlights the commitment to sophisticated trading tools and platforms for crypto derivatives, benefiting institutional traders.
Guest Introduction: Fabio Bassani's Crypto Journey
Joe Kruy acknowledges Fabio Bassani's return to the podcast and asks him to share his background and journey into the crypto space. Fabio reveals his statistical and economic background but expresses his passion for trading, which led him to explore options trading in the equities market. His fascination with Austrian economics and anarcho-capitalism eventually drew him into the world of cryptocurrencies, starting with Bitcoin in 2013. Fabio now works as a data scientist at Amberdata, collaborating with Greg Magadini on developing tools for traders interested in crypto derivatives.
Understanding Dealer Gamma Profiles
Greg Magadini introduces a crucial concept: the dealer gamma profile. He explains that this profile shows the net gamma rebalancing resulting from a one percent change in the underlying asset's price. Dealers typically aim to maintain a delta-neutral position, but when they are net short in options, they contribute to market volatility by selling when prices rise and buying when prices fall.
Bitcoin (BTC) vs. Ethereum (ETH) Dealer Gamma Profiles
Greg points out two notable dealer gamma profiles: one for Bitcoin (BTC) and one for Ethereum (ETH). BTC's profile reflects persistent negative gamma among dealers, leading to hedging activities that dampen upside movements. In contrast, ETH's profile reveals consistent net-long dealer positions, allowing dealers to capitalize on upside movements by selling accumulated delta.
Impact of Dealer Gamma on Market Dynamics
The discussion then moves to the cumulative funding rates on Deribit, specifically comparing BTC perpetual and ETH perpetual funding rates. Fabio highlights a divergence in funding rates starting in mid-September, coinciding with significant price movements in both assets. Fabio emphasizes that while crypto options might not yet impact broader markets, examining the Deribit ecosystem reveals correlations with funding rates and open interest, indicating the potential influence of gamma profiles.
Challenges and Considerations in Selling Volatility
Marty and Fabio share their perspectives on selling volatility, with Marty stating he's done with selling volatility due to the uncertainty and the risk of unexpected news impacting markets. They discuss the difficulty of timing and navigating the crypto options market, given its unique characteristics.
OTC Flow and Its Role
The conversation touches on the over-the-counter (OTC) flow in crypto options and how it complements listed options trading. Market makers emphasize that a significant portion of crypto trading occurs OTC, which can influence market dynamics differently.
Analyzing Skew Dynamics
Returning to BTC's options market, Joe Kruy points out the change in skew, with calls trading over puts across the curve compared to the previous week. He finds this change surprising, given the relatively minor price increase in BTC during that time. Greg speculates that it could be a result of low volatility, where tail risk is priced in, leading to cheaper belly options.
Market Catalysts and Volatility
The episode concludes with discussions about potential market catalysts and the volatility of the crypto options market. Greg mentions upcoming events that are potential catalysts like FOMC meetings and how they could impact market dynamics.
Conclusion
In summary, this podcast episode explores various technical aspects of the crypto options market, including dealer gamma profiles, funding rates, and skew dynamics. The participants discuss the challenges and opportunities of trading volatility in the crypto space, emphasizing the unique characteristics of this market and the potential impact of OTC flows. They also consider upcoming events as potential catalysts for market movements.
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