The cryptocurrency market is preparing for a significant structural adjustment on Friday, with billions in bitcoin and ether options expiring on Deribit.
This enormous “Boxing Day” event, named after the holiday celebrated in various nations on December 26, will witness the expiry of $23.6 billion in bitcoin options and $3.8 billion in ether options, ceasing trading and settling those contracts. These amounts reflect the dollar values of active options contracts at the time of reporting, with each contract representing 1 BTC or 1 ETH.
As per Deribit, the expiry, impacting over 50% of the total open interest on the centralized exchange, is noted for bullish positioning.
“The max pain level is around $96,000, while a put-call ratio of 0.38 indicates positioning skewed towards calls and a bullish sentiment,” Sidrah Fariq, Deribit’s global head of retail sales and business development, shared in a Telegram interview. The max pain price marks the point where options buyers incur maximum losses, while options sellers, typically large institutions and market makers, reap the highest profits.
Options are derivative contracts granting the buyer the privilege, not the obligation, to buy or sell the underlying asset at a specified price at a later date. A call option purchaser shows a bullish outlook on the market, whereas a put buyer is bearish, seeking to hedge against or capitalize on a potential price drop in the underlying asset.
The ‘max pain’ magnet
“Max pain” is one of the most scrutinized metrics as options expiry approaches. Due to the profit/loss stakes for both parties involved, some analysts propose that it leads to a tug-of-war among professional traders adjusting their hedges, often pulling the spot price toward the max pain level as the deadline nears.
In essence, advocates of this theory believe it suggests that bitcoin might climb to $96,000 and ether to $3,100 by the expiry date.
Nevertheless, the max pain theory remains a disputed concept within the wider crypto derivatives market, with numerous participants arguing it has minimal influence on prices.
Bullish bias meets holiday lull
Regarding the put-call ratio, it illustrates that for every 100 call options active, there are merely 38 puts.
This demonstrates the level of bullishness among traders throughout the year, seeking bullish exposure through call options. At the time of writing, the majority of open interest was found in calls at strikes between $100,000 and $116,000. Conversely, the $85,000 put stands as the most favored downside bet.
Large expiries like this one often result in volatility as traders rush to wrap up trades or roll over, shifting to new expiries. According to Fariq, certain put options at strike prices $70,000 to $85,000 are being repositioned into January expiries.
“The choice to let December put open interest expire or extend them will determine whether downside risk stems from year-end concerns or a structural risk reset,” Fariq noted.
Still, the upcoming settlement could proceed in a more orderly fashion, she pointed out.
“This significant expiry occurs on Boxing Day. Volatility remains subdued (with Deribit’s BTC DVOL around 45), and while overall activity stays high with an upside bias, the holiday season’s reduced liquidity and ongoing macroeconomic uncertainties moderate directional conviction,” Fariq commented.
The DVOL is the index representing bitcoin’s annualized 30-day expected price volatility. This options-based metric has decreased to 45% from 63% on November 21, when BTC plunged to nearly $80,000 on some exchanges.
The decline suggests that the market’s panic is waning and traders do not anticipate considerable volatility due to the expiry.
