After the recent cryptocurrency market sell-off, Ethereum has come pretty close to its maximum pain price. Additionally, altcoins like Ethereum or Cardano have faced pullbacks of up to 20%, resulting in a rapid drop above key values like $3,000 in Ethereum and $2 in Cardano. Details are here.
Options are another way of interpreting current market conditions. They provide data on possible support and resistance zones that appear in spot trading trades. Ethereum’s maximum pain price at press time is located at $2,880. So what is this maximum pain price?
First of all, for those who don’t know, options are derivative instruments that give the buyer the right to buy or sell the asset on a certain date or at a predetermined price. A call option gives the owner the right to buy, while the put buyer acquires the right to sell. Open interest, on the other hand, refers to the total number of unpaid derivative contracts that have not been closed.
The maximum pain price is the strike price with the most intense open options contracts, including puts and calls. The main point of the maximum pain price is that if the price of an asset reaches its owners, they face huge financial losses. The term itself is based on the theory of maximum pain, which does not recommend holding options contracts until expiration. This theory also refers to the ability of the large investor to make a manipulative maneuver against the small investor. According to the theory, the price of the asset in question tends to move towards this maximum pain price. So what can happen if it reaches the maximum pain price?
First of all, if Ethereum hits the strike price of $2,880, most options holders will face huge losses. Large losses for option holders will not be reflected in spot trading pairs as they are two different markets. Negative price action in the ETH pair will be part of the current trend.
Typically, traders use options contracts to hedge their positions in the spot or derivatives markets (futures). Trading the options themselves is extremely risky due to the high volatility of the contract price.
Finally, at press time, Ethereum is trading at $2,905 with a put/call ratio of 0.69, meaning there are more call options than puts.
Disclaimer: What is written here is not investment advice. Cryptocurrency investments are high-risk investments. Every investment decision is under the individual’s own responsibility. Finally, Koinfinans and the author of this content cannot be held responsible for personal investment decisions.