The members of the Ethereum Foundation expect the “merger” to happen before the end of the year and experienced options traders will benefit from this options strategy.
The long-awaited transition of Ethereum from Proof-of-Work (PoW) mining has recently suffered another delay and is expected to happen in the second half of 2022.
Ethereum developer Tim Beiko stated on April 13: “It won’t be June, but probably a few months after that. There is no exact date yet, but we are definitely in the final chapter of PoW on Ethereum.”
An automatic increase in mining difficulty, designed to make PoW mining less attractive, is planned to be activated in May. Known as the “difficulty bomb”, it will eventually make blocks “painfully slow” and force a switch to a Proof-of-Stake (PoS) network.
Such news could have had a negative impact on the price of Ether (ETH), but it creates a huge opportunity for those who bet on the efficiency and potential benefits of faster and cheaper transactions.
While it is possible to use futures contracts to add to your long positions, they run the risk of being liquidated in the event of a sudden negative price move prior to a network upgrade. Hence, professional traders are more likely to opt for an options trading strategy such as Long Butterfly.
By trading multiple call (purchase) options with the same expiration date, you can make a profit of 3.2 times the potential loss. The options strategy allows the trader to profit from growth while limiting losses.
It is important to remember that all options have a set expiration date, so an increase in the price of an asset must occur within a set period.
Using call options to limit a downtrend
Below are the expected returns using Ethereum options expiring September 22, but this method can be applied to other timeframes as well. Although the costs vary, the overall efficiency does not decrease.
Estimated profit/loss. Source: Deribit Position Builder
This purchase option gives the buyer the right to purchase the asset, but the seller of the contract receives a (potential) negative risk. The Long Butterfly strategy calls for a short position using a $5,000 call option.
To initiate exercise, the investor buys 14 Ether call options with a strike price of $3,500 and simultaneously sells 21 $5,000 call contracts. To complete the trade, you need to buy 8 contracts of ETH call options for $7,000 to avoid losses above this level.
Derivatives exchange contracts in ETH and $2937 was the price when this strategy was listed.
Trading provides limited downside potential with a possible profit of 3.2 ETH.
With this strategy, any outcome from $3,770 (up 28%) to $7,000 (up 139%) results in a net profit – for example, a 40% price increase to $4,112 results in an ETH profit of 1.1.
Meanwhile, if the price drops below $3,500 on September 22, the maximum loss will be 0.99 ETH. So a long butterfly is a potential win of 3.2 times the maximum loss.
See also: Altcoin Roundup: Analyst Comments on the Impact of Ethereum Review Delay
In general, trading offers a better risk/reward ratio than leveraged futures trading, especially given the limited downsides. This certainly looks like an attractive bet for those who expect a PoW migration sometime in the next five months.
It is worth emphasizing that only an upfront payment of 0.99 ETH is required, which is enough to cover the maximum loss.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. When making a decision, you should do your own research.