A record-high 458,000 Ethereum options contracts expired on September 25, during what experts describe as a “max pain” expiration.
Before the expiration, Shaun Fernando, who leads risk and product strategy at Deribit, said in an interview that volatility could increase.
Since then, the price of Ethereum has increased from $337 to $367, by 8.9% within three days.
The Meaning Of Max Pain Expiration And It’s Significance To Ethereum Price
A max pain expiration occurs when options expire at a price that would cause financial losses for most option holders. It is essentially an expiration that benefits underwriters, causing the majority of options buyers losses.
For the September expiration of Ethereum options, the max pain price was at $340. The price of Ethereum hovered at around $338 to $343 during the expiration across major exchanges.
Coincidentally, Ethereum rallied after the expiration and has kept strong momentum since. The expiration occurred at 8 am UTC on September 25. In the next two days that followed, ETH rose from $337 to as high as $362 on Binance, by 7%.
Ethereum could have rallied after the options expired because it alleviated pressure from the markets. Before or upon the expiration, traders typically close or buy back their options contracts. That causes volatility to build, either causing buying demand or selling pressure.
The max pain expiry is not necessarily bearish or bullish for the price of Ethereum. But it indicates that leading up to the expiration, there could have been sell-side pressure on spot markets from ETH option contract buyers.
Prior to the expiration, Fernando said in an interview that increased trading activity and volatility would likely happen.
“Also expect volatility and increased trading activity on the Perpetual and Futures during the 30 min settlement period as traders roll over deltas,” he explained.
Fernando said that almost 5% of the entire open interest of Ethereum options are at the $340 strike price. The max pain expiration could cause volatility, the analyst said.
“At over 1.2 million contracts outstanding, ETH OI is at an all time high. A record of over 400k OI contracts will expire during this quarterly expiry. Nearly 5% of the expiry’s open interest is stacked on the 340 strike, which can cause increased volatility as we move towards expiry with traders having different gamma hedging strategies,” stated Fernando.
Fundamental And Technical Factors Optimistic For ETH
In the near term, Ethereum faces two technical resistance areas at $373 and $390. Some traders are seemingly turning cautiously optimistic as ETH showed resilience above the $330 support level.
The strong technicals of ETH are supplemented by the strengthening fundamentals of the Ethereum blockchain.
According to the data from Etherscan, the number of daily transactions on Ethereum achieved an all-time high. It surpassed levels seen in January 2018, when the price of ETH reached a record high. The data shows that there is significant user demand and activity coming from the decentralized finance (DeFi) market.
Major multi-billion dollar conglomerates are also building on top of Ethereum, which strengthens its dominance as the go-to smart contract protocol.
Most recently, the Big Four auditor Ernst & Young released the EY OpsChain Network Procurement on Ethereum. The platform allows companies to run procurement activities on the public Ethereum blockchain network.