Bitcoin (BTC) and Ethereum (ETH) have been following a relatively moderate positive trend in the past 24 hours, while the prices of the two largest cryptocurrencies continue to remain well below levels that would inflict “maximum pain” on buyers of August futures contracts.
Deribit, the world’s largest cryptocurrency options exchange by trading volume on August 25, will settle and close a Bitcoin options contract worth 72,000 BTC ($1.9 billion) and an Ethereum options contract worth 535,000 ETH ($893 million). The maximum pain prices for BTC and ETH options are currently at $28,000 and $1,800, respectively.
The basic theory of options trading is to push the spot price of the underlying asset towards the maximum pain level for call or put options, in order to maximize the pain for option investors on the other side. Cryptocurrencies are traded in these spot/futures markets by buying and selling cryptocurrencies.
Therefore, assuming other factors that could affect the market remain constant, BTC and ETH could trade near these maximum pain points in the next 24 hours. The maximum pain points will become invalid after the expiration of the contracts. The options contracts on Deribit will expire at 11:00 AM UTC on August 25. One Bitcoin options contract represents 1 BTC, while one Ethereum options contract represents 1 ETH. The options exchange holds a significant position by controlling approximately 90% of global cryptocurrency options activity.
Lin Chen, Deribit’s Asia business development executive, stated to CoinDesk, “Put option buyers will be the net winners at expiration.” He added, “A significant number of put options have been converted to cash.” A cash-settled option is an option that has a strike price higher than the market price of the underlying asset. This means that the put option holder can sell the underlying asset at a higher price than the current market price.
A put option gives the holder the right to sell the underlying asset at a predetermined price on a later date, but does not impose an obligation. On the other hand, a call option gives the holder the right to buy.