Pro traders can use this ‘risk averse’ Ethereum options strategy to trade the Merge . to play


Ether (ETH) reaches a make-it or break-it point as the network moves away from proof-of-work (PoW) mining. Unfortunately, many novice traders tend to miss the mark when creating strategies to maximize profits on potential positive developments.

For example, buying ETH derivative contracts is a cheap and easy mechanism to maximize profits. The perpetual futures are often used to leverage positions, and one can easily multiply profits fivefold.

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

The main problem is Ether’s volatility and its steep price swings. For example, since July 2021, the ETH price has crashed by 19% from its starting point within 20 days in 118 out of 365 days. This means that any long position with 5x leverage has been forcefully terminated.

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How Professional Traders Play the “Risk Reversal” Option Strategy

Despite the consensus that crypto derivatives are primarily used for gambling and excessive leverage, these instruments were initially designed for hedging.

Options trading offers investors opportunities to protect their positions against sharp price drops and even take advantage of increased volatility. These more sophisticated investment strategies usually involve more than one instrument and are commonly known as “structures.”

Investors rely on the “risk reversal” option strategy to hedge losses from unexpected price swings. The holder benefits from being long on the call (buy) options, but the costs are covered by selling a put (sell) option. Basically, this setup eliminates the risk of sideways trading ETH, but it does incur a moderate loss if the asset falls.

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Profit and Loss Estimation. Source: Deribit Position Builder

The above trading focuses solely on the August 26 options, but investors will find similar patterns with different maturities. Ether was trading at $1,729 when the pricing took place.

First, the trader must buy protection against a downward movement by buying 10.2 ETH put (sell) options contracts of $1,500. Then the trader will sell 9 ETH put (sell) options contracts of $1,700 to settle returns above this level. Finally, the trader must buy 10 call (buy) $2,200 option contracts for positive price exposure.

It is important to remember that all options have a fixed expiration date, so the price increase of the asset must occur during the defined period.

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

That option structure results in no gain or loss between $1,700 and $2,200 (up 27%). Thus, the investor is betting that the price of Ether will be above that range on August 26 at 8:00 am UTC, exposing him to unlimited gains and a maximum loss of 1,185 ETH.

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If the price of Ether climbs to $2,490 (up 44%), this investment would result in a net gain of 1,185 ETH, covering the maximum loss. In addition, a 56% pump to $2,700 would yield a net gain of ETH 1.87. The main advantage for the holder is the limited disadvantage.

While there are no fees associated with this option structure, the exchange requires a margin deposit of up to 1,185 ETH to cover potential losses.

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