Professional traders can use this “risk-averse” Ethereum options strategy in anticipation of “The Meltdown”

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

For example, buying ETH derivatives contracts is a cheap and easy mechanism to maximize profits. Perpetual futures are often used to leverage positions, and one can easily increase profits five times.

So why not use reverse 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 the volatility of Ether and its strong price fluctuations. For example, since July 2021, the price of ETH has plunged 19% from its starting point in 20 days in 118 of 365 days. This means that any long position with 5x leverage will have been forcibly terminated.

How Pro Traders Play the “Risk Reversal” Options Strategy

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

Options trading presents opportunities for investors to protect their positions from sharp price declines and even benefit from increased volatility. These more advanced investment strategies generally 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 having a long position in call options, but the cost of these is covered by the sale of a put option. In short, this setup removes the risk of ETH trading sideways, but carries a moderate loss if the asset trades lower.

Estimation of profits and losses. Source: Deribit Position Builder

The above trade focuses exclusively on the August 26 options, but investors will find similar patterns using different expirations. Ether was trading at $1,729 when the pricing was done.

First, the trader needs to buy protection against a move lower by buying $1,500 put option contracts for 10.2 ETH. The trader will then sell 9 $1,700 ETH put option contracts to offset returns above this level. Finally, the trader must buy 10 $2,200 call option contracts for positive price exposure.

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

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

That option structure results in neither a gain nor a loss between $1,700 and $2,200 (up 27%). Therefore, the investor bets that the price of Ether on August 26 at 8:00 am UTC will be above that range, gaining exposure to unlimited gains and a maximum loss of 1,185 ETH.

If the price of Ether rises to USD 2,490 (up 44%), this investment would generate a net profit of 1,185 ETH, which would cover the maximum loss. Furthermore, a 56% increase to $2,700 would result in a net gain of 1.87 ETH. The main benefit to the holder is the limited downside.

Although there is no cost associated with this option structure, the exchange will require a margin deposit of up to 1,185 ETH to cover potential losses.

The views and opinions expressed herein are solely those of the Author and do not necessarily reflect the views of Every investment and trading move involves risk, you should do your own research when making a decision.

Investments in crypto assets are not regulated. They may not be suitable for retail investors and the full amount invested may be lost. The services or products offered are not aimed at or accessible to investors in Spain.

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