The crypto market is gearing up for a massive structural reset on Friday with billions of dollars worth of bitcoin and ether settings set to expire on Deribit.
This colossal “Boxing Day” event, named after the holiday observed in many countries on December 26, will see $23.6 billion in bitcoin options and $3.8 billion in ether options expire, meaning they stop trading and are settled. These numbers reflect the dollar values of active options contracts at press time, 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 a bullish positioning.
“The maximum pain level is near $96,000, while a put-call ratio of 0.38 reflects positioning skewed against calls and a bullish bias,” said Sidrah Fariq, Deribit’s global head of retail sales and business development, in an interview on Telegram. The maximum pain price is the level where option buyers stand to lose the most money and option sellers, usually large institutions and market makers, make the most.
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 buyer is bearish and seeks to hedge or profit from a potential price decline in the underlying asset.
The ‘Max pain’ magnet
“Max pain” is one of the most viewed numbers when options expire. Because of the profit/loss implications for the two sides of the contract, some observers suggest it creates a tug-of-war between professional traders who adjust their hedges, often moving the spot price towards the maximum pain level as the clock ticks down.
Essentially, proponents of the theory suggest that it suggests bitcoin could rise to $96,000 and ether to $3,100 by expiration.
Still, the maximum pain hypothesis remains a contentious and debated concept within the broader crypto derivatives landscape, with many market participants suggesting it has little effect on prices.
Bullish bias meets holiday break
As for the put-call ratio, it indicates that for every 100 call options in play, there are only 38 puts.
It shows how bullish traders have been throughout the year, chasing bullish exposure via call options. At the time of writing, the most open interest was concentrated in calls for strikes from $100,000 to $116,000. Meanwhile, the $85,000 put was the most popular downside bet.
Large expirations like this typically breed volatility as traders struggle to close trades or rollover, that is, switch to new expirations. According to Fariq, some put options at strike $70,000 to $85,000 are rolled into January expiration.
“The decision to let December open rates expire or extend them will determine whether the downside risk is due to year-end risk or a structural risk reset,” Fariq said.
Still, the impending settlement could be more orderly, she added.
“The huge expiration comes on Boxing Day. Volatility remains contained (Deribit’s BTC DVOL around 45) and while overall activity remains high and upside exposure dominates, the diluted liquidity of the holiday season and ongoing macro uncertainty dampens directional conviction,” noted Fariq.
DVOL is the index representing bitcoin’s annual 30-day implied or expected price turbulence. This options-based metric has pulled back to 45% from 63% on November 21st, when BTC fell to nearly $80,000 on some exchanges.
The decline indicates that the market’s sense of panic is fading and traders are not necessarily seeing too much volatility due to expiration.
