Bullish on Ethereum’s London hard fork? Here is an option strategy that is used by professional traders
The Ethereum network is undergoing a major upgrade on August 4th as the long-awaited London hard fork is expected to start at block 12,965,000. The transition is part of a roadmap leading to the Ethereum 2.0 release, which aims to migrate the network to a proof-of-stake consensus mechanism.
By no longer relying on intensive energy-consuming mining, the main goal is to dramatically increase the capacity of the network through parallel processing, also known as sharding.
The upcoming London upgrade will implement the critical Ethereum Improvement Proposal EIP-1559, which will make Ether (ETH) gas costs more predictable. This controversial change involves a process of burning transaction fees that could potentially turn Ether into a deflationary asset.
Last month the price of Ether has been in bearish slump, although the price bounced back well from falling to $ 1,500, but traders are still cautious about opening positions. For the current nature of the price action, option strategies provide excellent opportunities for investors with a narrow target range for an asset.
For example, using leveraged futures contracts could be a solution to a scenario where a price increase of 20% is expected but limiting the downtrend would require a tight stop loss. In short, the risk / reward ratio usually doesn’t pay off in volatile markets.
Let’s examine how the long butterfly options strategy can give traders an edge in tight markets.
Trading options can help investors avoid liquidations
Using multiple calls (buy) options can create a strategy that allows for gains three times the potential loss. The long butterfly strategy enables a trader to profit from the uptrend while limiting losses.
It is important to remember that all options have a set expiration date and therefore the asset’s price appreciation must occur during the set time period.
Below are the expected returns with Ether options for the August 27th expiration, but this strategy can be used with other time frames as well. Although costs vary, overall efficiency is not affected.
Profit / loss estimate. Source: Deribit Position Builder
This call option gives the buyer the right to acquire an asset while the contract seller receives (potential) negative exposure. Because of this, the Long Butterfly strategy opens a short position with the call option of $ 2,800.
To execute the order, the investor buys 3 ether call options with an exercise price of USD 2,400 and sells 4 of the USD 2,800 calls at the same time. To complete the trade, you must buy 1 ether of the $ 4,000 call options to create upside protection.
Derivatives exchange price contracts in ETH terms and $ 2,366 was the price when this strategy was quoted.
The price is 3-to-1 wins with limited disadvantages
In this situation, any result between $ 2,485 (5% profit) and $ 3,620 (53% profit) results in a net profit – for example, a price increase of 15% to $ 2,720 results in a 0.25 Ethernet profit.
Meanwhile, if the price is below $ 2,400 or above $ 4,000 on August 27, the maximum loss is 0.105 ether.
The appeal of the butterfly strategy is a potential .32 ether at $ 2,820, which is three times the maximum loss. Overall, the trade delivers a much better risk / return result compared to trading leveraged futures, given the limited drawbacks.
Multi-strike option strategies provide a reasonable advantage for bullish traders seeking exposure to Ethereum’s London hard fork on August 4th. The only required upfront fee is 0.105 ether, which is enough to cover the maximum loss.
The views and opinions expressed are those of the author only 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.