Recent Ether (ETH), gains of 60% have been a result of being bullish. The rapid growth in Decentralized Finance (DeFi) applications probably fueled institutional investor inflow. A fee burn mechanism was implemented by the London Hard Fork, which drastically decreased daily net issuance.
Ether isn’t yet a fully-deflationary asset but the upgrade opened the door for Eth2, and the network will soon abandon traditional mining to join the proof-of stake consensus. Ether will be slightly deflationary if fees are not higher than a threshold and network stake remains at a high level.
There are still calls daily for Ether to rally over $5,000 in light of the recent rally. However, even the most bullish investors realize that a 90% rally at the $3,300 level is unlikely before year’s end.
If the cryptocurrency market reacts negatively towards the possible regulation from Don Beyer, the United States Representative for Virginia, it would be prudent to have a safety network.
Despite being in its initial stages, “The Digital Asset Market Structure & Investor Protection Act of 2020” proposes formalizing regulatory requirements for all digital assets.
Limit the upside to reduce your losses
Given the regulatory risks associated with crypto assets, it seems prudent to find a strategy that maximises gains upto $5,000 per year and minimizes losses below $2,500. This would help prepare investors for both.
This strategy is the best, and it’s slightly biased for bullish results.
Options for Ether Iron condorskewed strategy returns Source: Deribit Position Builder
Call option allows the buyer to purchase an asset at a future fixed price. The buyer must pay a premium upfront in order to enjoy this privilege. The downside is that selling a call option can cause a negative impact on the asset’s price.
A put option allows its buyer to sell the asset at a fixed future price, which is a downside protection strategy. Selling this instrument gives you exposure to the upside in price.
Iron condor is essentially a sale of both call and put options at the exact same expiry date and price. This example was created using Deribit’s ETH December 31 options.
Maximum profit is 2.5x greater than potential loss
The buyer would simultaneously shorten (sell) 0.50 calls and put options worth $3,520 to initiate the trade. The buyer will then need to go through the same procedure as for the $4,000 options. A protective cover of $2,560 was used to protect against extreme price movements. According to the remaining contracts’ price, 1.47 contracts may be required.
To limit the risk of losing the strategy, Ether will be sold at 0.53 call option contracts if its price rises to more than $7,000
The above example shows a maximum ETH 0.295 gain, and a possible ETH 0.11 loss. However, most derivatives exchanges will accept orders as low at 0.10 contracts.
This strategy will yield a net profit if Ether trades between $1,774 and $3,100, which is 10.5% lower than the current price of $5,830.
An investor can make a profit by using the distorted version of the iron condor as long as the Ether price rise is less than 88% per year.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.