Ethereum gamma squeeze and the risks of poorly managed vaults

Deribit analysts reported a 40% spike in open interest for the weekly expiry. This concentration creates massive pressure near specific strikes. When ETH price moves toward these levels, market makers must manage their gamma exposure to protect their profit streams. If dealers hold short gamma positions, they buy the underlying asset to hedge their delta. This buying pressure creates a "Hedge Wall" that accelerates price movement. I find the failure to account for this convexity to be the most obvious mistake. Market makers use options to neutralize gamma because stocks do not exhibit the convex characteristics needed for a complete hedge. If a long call option position has a delta of 0.47 and a gamma of 0.03, an increase in the underlying asset by $1 changes the delta to 0.50. Market makers must implement these hedging trades quickly through computer programs to limit risk. To provide a complete hedge, market makers combine both stocks and options in their hedging trades. Without active market makers, spreads widen and liquidity thins.

Delta hedging is not enough

Delta hedging alone fails to offset sharp movement risks. Market makers monitor gamma to measure sensitivity to large price swings. Traders often ignore the fact that delta changes throughout the day. I view the reliance on simple delta-neutrality without gamma protection as a recipe for disaster. Most traders focus on the funding rate but forget the liquidation risk on the leveraged leg. A 10x leveraged short position liquidates on a 10% upward move even if the spot position gains value because exchanges calculate liquidation based on isolated margin rather than the total portfolio. I find the "safe leverage" illusion to be a dangerous trap.

The penalty for a liquidated position in a thin market reaches 20% of the capital due to slippage. This figure aggregates the 5% liquidation bonus on Sui-based protocols like NAVI and the opportunity cost of the unwound position due to market-impact slippage. Traders also face funding-regime risk because a rate that pays 0.02% per eight-hour interval can flip to -0.01% after a single liquidation cascade. I see the error when traders enter a position based on a $3 daily return on a $10,000 notional short and fee drag consumes the remaining margin. Traders also ignore basis-compression risk where the premium between futures and spot narrows faster than anticipated.

The vault liquidity trap

Vaults face extreme liquidity risk when volatility spikes. Curators manage these risks by setting allocation limits and collateral whitelists. However, the fall of USDe to $0.65 on Binance in October 2025 shows how oracle errors trigger mass liquidations. When price feeds reference thin order books, the resulting inaccuracy causes immediate distress. I think the most glaring failure involves the reliance on single-source oracles. When the market moves too fast, the gap between the oracle price and the actual market price widens.

Liquidity risk prevents depositors from exiting vaults during rapid moves. Curators on Morpho manage billions in assets by setting maximum exposure per market and collateral requirements. Morpho holds roughly $5.8 billion in total value locked across its two-layer architecture. Kamino manages roughly $2.36 billion on Solana and uses Gauntlet to manage approximately $140 million in strategies. In March 2026, Resolv Labs’ USR collapsed after an attacker minted 80M unbacked tokens, which generated bad debt across several vaults on Morpho and Euler. When borrowing demand outpaces supply, insufficient liquidity remains for withdrawals. Does the liquidity in a Morpho vault remain sufficient when everyone tries to redeem at once? I see the error in the failure to account for the time needed to rebalance. Traders must prioritize liquidity and delta-gamma neutrality to survive these expiries.