Being bullish on Ether (ETH) has paid off lately as the token has gained 60% in the past 30 days. The spectacular growth in decentralized financial (DeFi) applications has likely fueled the inflow of institutional investors, and the recent London hard fork introduced a fee-burning mechanism that has drastically reduced net daily issuance.
While Ether is not yet a fully deflationary asset, the upgrade paved the way for Ethereum 2.0 (Eth2), and the network is expected to give up traditional mining and soon join the proof-of-stake consensus. Ether will then be slightly deflationary as long as the fees stay above a certain threshold and stick to the network stake level.
Given the recent rally, there are still daily calls for Ether to rally above $ 5,000, but surely even the most optimistic investor knows that a 90% rally from the current $ 3,300 mark before the end of the year looks unlikely.
It seems wiser to have a safety net when the cryptocurrency market reacts negatively to potential regulation by US representative Don Beyer of Virginia.
Although it is still in its early stages, the proposal for the “Act on the Market Structure and Investor Protection for Digital Assets of 2021” aims to formalize the regulatory requirements for all digital assets and digital asset securities under the Banking Secrecy Act and to classify both as “monetary instruments”.
Reduce your losses by limiting upside potential
Given the ongoing regulatory risks that exist for crypto assets, finding a strategy that maximizes profits up to $ 5,000 by year-end while limiting losses below $ 2,500 seems like a prudent and well-balanced decision to make. would prepare investors for both scenarios.
There is no better way to do this than using the “Iron Condor” option strategy, which is easily geared towards a bullish outcome.
Ether Options Iron Condor distorted strategy rates. Source: Deribit Position Builder
The call option gives the buyer the right to purchase an asset at a fixed price in the future. For this privilege, the buyer pays an upfront fee known as a premium. Selling a call option, on the other hand, leads to a negative exposure to the asset price.
The put option gives its buyer the privilege of selling an asset at a fixed price in the future – a strategy to protect against price losses. In the meantime, selling this instrument offers exposure to the uptrend.
The Iron Condor basically sells both the call and the put option at the same expiry price and date. The above example was discontinued at Deribit with the ETH options from December 31st.
The maximum gain is 2.5x greater than the potential loss
The buyer would initiate the trade by simultaneously shorting (selling) 0.50 contracts of the $ 3,520 call and put options. Then the buyer must repeat the process for the $ 4,000 options. To protect against extreme price movements, a protective put was used at $ 2,560. As a result, 1.47 contracts are required depending on the price paid for the remaining contracts.
Eventually, in the event the price of Ether goes above $ 7,000, the buyer must purchase 0.53 call options contracts to limit the potential loss of the strategy.
Although the number of contracts in the example above aims for a maximum ETH gain of 0.295 and a potential ETH loss of 0.11, most derivatives exchanges will only accept orders of 0.10 contracts.
This strategy will result in a net profit if Ether trades between $ 2,774, which is 10.5% below its current price of $ 3,100, to $ 5,830 on December 31st.
By using the leaning version of the Iron Condor, an investor can benefit as long as the Ether price increase is below 88% by the end of the year.
The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading movement carries risks. You should do your own research when making a decision.