Professional Ethereum traders can use this options strategy to “minimize the risk” of exposure to The Merge

O Ether (ETH) is reaching a tipping point as the network moves away from proof-of-work (PoW) mining. Unfortunately, many newbie traders tend to miss the mark when creating strategies to maximize gains on possible positive moves.

For example, buying ETH derivative contracts is a simple and cheap mechanism to maximize gains. Perpetual futures contracts are often used to leverage positions, and one can easily multiply profits by five.

So why not use reverse swaps? The main reason is the threat of forced liquidation. If the price of ETH drops 19% from the entry point, the leveraged buyer loses the entire investment.

The main problem is the volatility of Ether and its strong price fluctuations. For example, since July 2021, the price of ETH has fallen 19% since its entry point in 20 days in at least 118 days out of 365. This means that any 5x leveraged long position will be forcefully liquidated.

How Professional Traders Play the “Risk Minimization” Options Strategy

Despite the consensus that cryptocurrency derivatives are primarily used for speculation and excessive leverage, these instruments were originally designed to provide traders with protection.

Options trading offers investors the opportunity to protect their positions against sharp price declines and even profit from increased volatility. These more advanced investment strategies often involve more than one instrument and are commonly referred to as “structures”.

Investors rely on the “risk minimization” options strategy to protect losses from unexpected price fluctuations. The holder benefits from being positioned on long options, but the cost of these options is covered by the sale of a put option. In short, this setup eliminates the risk of trading ETH sideways, but incurs a moderate loss if the asset is trading lower.

Estimated gains and losses. Source: Derisory Position Generator

The trading above focuses exclusively on options expiring August 26, but investors will find similar patterns using different expirations. Ether was trading at $1,729 when the price took place.

First, the trader should buy protection against a downside movement by buying put options contracts of 10.2 ETH at $1,500. The trader will then sell 9 contracts of ETH put options at $1,700 to offset returns above this level. Finally, the trader must buy 10 call option contracts of $2,200 to gain exposure to the upside price.

It is important to remember that all options have a set expiry date, therefore, the appreciation in the price of the asset must occur within the set period.

Traders are protected from a price drop below $1,500

This option structure results in no gain or loss between $1,700 and $2,200 (27% appreciation). Thus, the investor bets that the price of Ether on August 26 at 8:00 UTC will be above this range, exposing himself to unlimited profits and a maximum loss of 1,185 ETH.

If the price of Ether rises to $2,490 (44% appreciation), this investment would result in a net gain of 1,185 ETH – covering the maximum loss. Additionally, a 56% appreciation to $2,700 would yield a net profit of 1.87 ETH. The main advantage for the holder is the limited inconvenience.

Although there is no cost associated with this options structure, the exchange will require a margin deposit of up to 1,185 ETH to cover potential losses.

The opinions and views expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.


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