The trading market is brutal, but there is nothing as brutal as a strategy to inflict maximum pain on one’s trading counterparty. There is even a word for it, they call it “max pain”. The much-anticipated $6 Billion Bitcoin options contract expiry is going to inject some volatility into the market. Nevertheless, by the end of the week potential downward pressure may no longer exist.
Max-Pain Theory explains the phenomenon of maximum pain price. It is a price point or strike price (K) at which the underlying asset ( stock or Bitcoin) will cause the greatest financial loss for the largest number of option holders at an expiration. The Max-Point theory explains that the market will usually gravitate towards the pain point when heading into the date of expiry.
This can get all too confusing.. So let’s start from the start. Options are derivates. In simple terms, it is a contract between two or more parties whose value is dependent on the value of an underlying asset or security. An Option can be classified into a Call option and a Put option. While the call option gives the trader a right but an obligation to buy the call option, the put option gives her the right but an obligation to sell the option contract. The strike price the contracted price (k) at which the option can be bought or sold at the date of expiration. It is determined when the contract is first written.
In this all, traders use the term “In the money” ITM and Out of the Money (OTM). A call option is said to be in the In the Money (ITM) when the underlying price of the securitized asset is above the call option’s strike price. So, if the underlying security is below the strike price of a call option, the option contract will not hold any intrinsic value, as it will now be expensive to exercise the right to buy the option than to purchase the underlying asset itself. Here the option will be Out of the Money (OTM).
According to Luuk Stergis COO of Deribit, the Max Pain for today’s (Mach 26th) $6 Billion option expiry is $44000. The Bitcoin price is going to face volatility leading up to the option expiry. That does mean the market will move to $44000 by the end of Friday but implies downward pressure potentially may not exist by the end of this week.
Despite, the volatility brought by the Max Pain phenomenon of the trading world, fundamentally nothing has changed for Bitcoin. Invest in Bitcoin and Altcoins like XcelToken Plus while being mindful of traders who inject volatility in the market. Start small, invest a small portion of your income every month to gain steady exposure to cryptocurrency. You can start small by investing in XcelToken Plus an ERC-20 utility token built on Etherum Platform that you can use to book flights and hotels in decentralized travel platforms.