Bitcoin, Ether Trade Below 'Maximum Pain' Levels Ahead of $2.7B Options Settlement

While bitcoin (BTC) and ether (ETH) have chalked out moderate gains in the past 24 hours, prices remain well below levels that are likely to inflict "maximum pain" on buyers of August expiry option contracts.

On Friday, Deribit, the world's leading crypto options exchange by open interest and volume, will settle 72,000 BTC August options contracts worth $1.9 billion and 535,000 ETH options contracts valued at $893 million.

The max pain levels for BTC and ETH settlements are currently at $28,000 and $1,800.

The popular theory is that writers or sellers of call options and put options often look to push the underlying asset's spot price toward the max pain level to make their counterparties, the options buyers, suffer the most. They do so by buying/selling the cryptocurrency in the spot/futures markets.

So, assuming other factors remain constant, BTC and ETH could trade close to the respective max pain points in the next 24 hours. The max pain points will become invalid following the expiry. Deribit settles options on Friday at 08:00 UTC. On Deribit, one options contract represents 1 BTC and 1 ETH. The exchange controls nearly 90% of the global crypto options activity.

"Buyers of BTC and ETH put options are clear winners heading into the expiry," Deribit's Asia business development personnel Lin Chen told CoinDesk. "A lot of put options are in-the-money."

An in-the-money put is the one with a strike price higher than the going market rate of the underlying asset. It means the ITM put holder can sell the underlying asset at a price greater than the current market rate.

A put option gives the holder the right but not the obligation to sell the underlying asset at a predetermined price on a later date. A call gives the right to buy.

Most ether call options are set to expire out-of-the-money, thanks to last week's 8.3% slide. Bitcoin's open interest distribution paints a similar picture, as the feature image shows. The leading cryptocurrency by market value tanked over 10% last week, its biggest slide since the collapse of FTX in November.