The cryptocurrency market is set for a massive structural reset on Friday, with billions of dollars worth of bitcoin. and ether options set to expire on Deribit.
In this colossal “Boxing Day” event, named after the holiday celebrated in many countries on December 26, $23.6 billion in bitcoin options and $3.8 billion in ether options will expire, meaning they will stop trading and be liquidated. These figures reflect the dollar values of active options contracts at the time of this publication, with each contract representing 1 BTC or 1 ETH.
According to Deribit, the expiration, which affects more than 50% of the total open interest on the centralized exchange, is characterized by bullish positioning.
“The maximum pain level is near $96,000, while a put-call ratio of 0.38 reflects a biased positioning towards calls and a bullish bias,” Sidrah Fariq, global head of retail sales and business development at Deribit, said in an interview on Telegram. The maximum pain price is the level at which option buyers stand to lose the most money and option sellers, typically large institutions and market makers, make the largest profits.
Options are derivative contracts that give the buyer the right, but not the obligation, to buy or sell the underlying asset at a predetermined price at a later date. A call option buyer is implicitly bullish on the market, while a put option buyer is bearish and looking to protect or profit from a possible drop in the price of the underlying asset.
The ‘maximum pain’ magnet
“Maximum pain” is one of the most watched numbers as options approach expiration. Because of the profit and loss implications for both sides of the contract, some observers suggest that it creates a tug-of-war between professional traders who adjust their hedges, often moving the spot price toward the maximum pain level as the clock ticks.
In essence, supporters of the theory suggest that it implies that bitcoin could rise to $96,000 and ether to $3,100 at expiration.
Still, the maximum pain hypothesis remains a controversial and debated concept within the broader crypto derivatives landscape, with many market participants suggesting it has little effect on prices.
Bullish bias meets Christmas calm
As for the put-call ratio, it indicates that for every 100 call options in play, there are only 38 put options.
It indicates how bullish traders have been throughout the year, pursuing bullish exposure through call options. At the time of writing, most of the open interest was concentrated in call options with strike prices ranging from $100,000 to $116,000. Meanwhile, the $85,000 put option was the most popular bearish bet.
Large expirations like this typically generate volatility as traders rush to close trades or reverse them, that is, move to new expirations. According to Fariq, some puts with strike prices between $70,000 and $85,000 are rolling over to expiration in January.
“The decision to let December open interest expire or extend it will determine whether the downside risk is due to year-end risk or a reset of structural risk,” Fariq said.
Still, the impending deal could be more orderly, he added.
“The big expiry comes on Boxing Day. Volatility remains subdued (Deribit’s BTC DVOL around 45), and while overall activity remains high and upside exposure dominates, the holiday season reduced liquidity and ongoing macroeconomic uncertainty tempers directional conviction,” Fariq noted.
The DVOL is the index that represents the implied or expected annualized 30-day price turbulence of bitcoin. This options-based metric has retreated to 45% from 63% on Nov. 21, when BTC plummeted to nearly $80,000 on some exchanges.
The drop indicates that the market’s sense of panic is fading and traders are not necessarily seeing huge volatility due to the expiry.
