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#1418 Jeff Park | The INSANE Bitcoin Super Cycle Thesis
The Pomp Podcast
Understanding Market Volatility through Options Trading Dynamics
The gamma position of dealers—whether they are short or long gamma—greatly influences market behavior and volatility. When dealers are long gamma, they typically hedge by buying options, which tends to stabilize the market through mean reversion. Conversely, when they are short gamma, it introduces additional volatility, as they must adjust their hedging positions in reaction to market movements. This scenario occurs when traders buy calls or puts, amplifying price movements. The unique risk profile of Bitcoin distinguishes it from traditional assets, particularly in its volatility characteristics. While most financial assets demonstrate a volatility skew where downside puts are more sought after, Bitcoin tends to exhibit a volatility smile, with equal value placed on upside and downside volatility. As a result, an increase in Bitcoin’s price leads to an increase in its implied volatility, creating a feedback loop that exacerbates price movements. This dynamic can result in significant volatility spikes, reminiscent of short squeezes seen in stocks like GameStop and AMC, as dealers are forced to buy more as volatility rises. Overall, understanding how dealer gamma positions interact with market mechanics is essential in predicting volatility and potential market movements in assets like Bitcoin.
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