They call it the “maximum pain” in the bitcoin options market: how to make one’s trading counterparty suffer the most.
Although the largest cryptocurrency was changing hands around $ 58,500 on Wednesday, traders were handicapping the odds of a dip to around $ 8,000,000 by Friday, when a record $ 4,0,0,0 The option contracts are set to expire.
A drop for that price level would inflict “maximum pain” on the buyers of the option contract, and may be the most profitable price point for option sellers. This is a remote risk, but one cannot be missed.
Maximum pain theory states that the market will tend to lean towards the pain point, while heading into expiration. This is because sellers – usually institutions with sufficient capital supplies or sophisticated traders – often try to push the price toward the maximum pain point by buying or selling assets on the spot or futures markets.
The fast spin is that if bitcoin makes it through Friday without any major improvements, a major overhang will be lifted.
“The maximum pain for the March 26 expiration is currently $ 6,000 on Deribit,” said Luin Strijers, CoinDesk, Deribit, the CCO of the world’s largest crypto options exchange by trading volume and open positions. “This does not mean that the market will move to $ 6,000 by the end of this week, but it does mean that this potential downward pressure no longer exists after Friday.”
Maximum pain is calculated by adding the outstanding put and call dollar value of each in-the-money (ITM) strike price. An ITM call is one where the put price is considered an ITM when the strike price is below the strike price of the put option, while the spot market price is below the strike price of the put option.