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


On October 1, the cryptocurrency market saw a 9.5% pump, pushing 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 supply on the stock exchanges and a bullish continuation chart formation.

Traders are unlikely to find any explanation for the sudden move, other than investor confidence regaining confidence after the September 19 decline was attributed to contagion fears from China-based real estate developer Evergrande.

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The Ethereum network has been criticized for the transaction costs of $ 20 or higher caused by the sale of non-fungible tokens (NFT) and decentralized financial activity (DeFi). Cross-chain bridges connecting Ethereum to proof-of-stake (PoS) networks have partially solved this problem, and the launch of the umbrella network oracle service on Friday shows how fast interoperability is advancing.

It is also worth mentioning that China’s even stricter rules announced last week have had a positive effect on the volumes on the decentralized exchanges (DEX). Centralized crypto exchanges, including Huobi and Binance, announced the cessation of services to Chinese residents, which was followed by a significant outflow of coins. At the same time, this increased the movement to Uniswap and the decentralized futures exchange dYdX.

Despite all of this volatility, there are still reasons behind the year-end investor uptrend in Ether. At the same time, the restrictions imposed by Ethereum Layer 1 scaling also resulted in some of its competitors posting significant gains in recent months.

ETH price vs. AVAX, SOL, ATOM. Source: TradingView

Notice how Ether’s 58% positive three-month performance is well below emerging proof-of-stake (PoS) solutions that offer smart contract functionality and interoperability.

For bullish traders who believe that ether price will break higher but are unwilling to face the liquidation risks imposed by futures contracts, the “Long Condor with Call Options” strategy may produce better results.

Let’s take a closer look at the strategy.

Options are a safer choice to avoid liquidations

Options markets offer more flexibility in developing custom strategies and two tools are available. The call option provides upside protection to the buyer and the protective put option does the opposite. Traders can also sell the derivatives to gain 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 to expire on December 31st and uses a slightly bullish range. The same basic structure can also be used for other time periods or price ranges, whereby the contract quantities may need to be adjusted.

Ether was trading at $ 3,300 when it was priced, but a similar result can be achieved from any price level.

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

To complete the strategy, the trader would need upside protection above $ 5,500 by buying 0.64 call options contracts should the ether price soar.

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

The strategy may sound complicated to implement, but the margin required is only 0.0314 ETH, which is also the maximum loss. The potential net profit arises when ether trades between $ 3,420 (up 3.6%) and $ 5,390 (up 63.3%).

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

With over 90 days until the expiry date, this strategy gives the owner security, as there is no liquidation risk as with futures trading.

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