Risk averse Ethereum traders use this options strategy to increase ETH exposure


On October 1, the cryptocurrency market experienced a 9.5% pump that drove Bitcoin (BTC) and Ether (ETH) to their highest levels in 12 days. Various reasons have been attributed to the price movement, including the US Consumer Price Index, declining stock market supply and the formation of a bullish “cup and handful” continuation chart.

Traders are unlikely to find an explanation for the sudden move, except for investors who regained confidence after the September 19 drop was attributed to contagion fears from China-based real estate developer Evergrande.

The Ethereum network has come under criticism due to transaction costs of $ 20 or more caused by non-fungible token (NFT) sales and decentralized fundraising (DeFi) activity. Cross-chain bridges connecting Ethereum to Proof of Stake (PoS) networks partially addressed this problem, and Friday’s Oracle Network Umbrella service launch shows how rapidly interoperability is advancing.

It should also be noted that the even stricter rules announced by China last week have had a positive impact on the volumes seen on decentralized exchanges (DEX). Centralized crypto exchanges, including Huobi and Binance, announced the suspension of service for Chinese residents, and a significant coin release followed. At the same time, this increased movement on Uniswap and the decentralized derivatives exchange dYdX.

Even with all of this volatility, there are still reasons for year-end investor optimism on Ether. At the same time, limitations imposed by Ethereum’s Layer 1 scaling have also caused some of its competitors to show significant gains in the past two months.

ETH price compared to AVAX, SOL, ATOM. Source: TradingView

Notice how Ether’s 58% positive performance in three months was significantly lower than that of emerging Proof of Stake (PoS) solutions offering smart contract capabilities and interoperability.

For bullish traders who believe the price of ether will rise higher but are unwilling to deal with the liquidation risks posed by futures contracts, the “long condor with calls” strategy could give more optimal results.

Let’s take a closer look at the strategy.

Options are a safer bet to avoid closeouts

Options markets offer more flexibility to develop personalized strategies and there are two instruments available. The call option provides the buyer with upside price protection, and the protective put does the opposite. Traders can also sell derivatives to create unlimited negative exposure, which is similar to a futures contract.

The ether options strategy returns. Source: Deribit Position Builder

This long condor strategy was set for the December 31 expiration and uses a slightly bullish range. The same basic structure can also be applied for other time periods or price ranges, although the contractual quantities may require some adjustment.

Ether was trading at $ 3,300 when pricing took place, but a similar result can be achieved from any price point.

The first trade requires the purchase of 0.50 contracts on call options of $ 3,200 to create positive exposure above this price level. Then, to limit gains above $ 3,840, the trader must sell call option contracts at 0.42 ETH. To further limit gains above $ 5,000, another 0.70 call option contract should be sold.

To complete the strategy, the trader needs upside protection above $ 5,500 by buying call option contracts at 0.64 if the price of ether skyrockets.

The risk-reward ratio of 1.65 to 1 is moderately bullish

The strategy may seem complicated to execute, but the required margin is only 0.0314 ETH which is also the maximum loss. The potential net profit occurs if Ether trades between $ 3,420 (up 3.6%) and $ 5,390 (up 63.3%).

Traders should remember that it is also possible to close the position before the December 31 expiration if there is sufficient liquidity. The maximum net gain is between $ 3,840 and $ 5,000 at 0.0513 ETH, which is 65% higher than the potential loss.

With over 90 days to the expiration date, this strategy gives the holder peace of mind as there is no liquidation risk like futures trading.

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

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