Pro traders may use this ‘risk averse’ Ethereum options strategy to play the Merge

As the network shifts away from proof of work (PoW), Ether (ETH), is at a critical point. Many novice traders miss the mark when trying to maximize potential positive developments.

To maximize your gains, you can buy ETH derivatives contracts. One can easily multiply profits by fivefold using perpetual futures, which are used to leverage positions.

Why not use inverse Swaps? There is a risk of forced liquidation. The entire investment is lost if ETH prices drop 19% below the entry point.

Ether’s volatile price and strong fluctuations are the main problems. ETH’s price has fallen 19% since July 2021. This happened in 118 of 365 days. Any 5x leverage long position must be terminated.

Pro traders use the “risk-reversal” option strategy

Although crypto derivatives are generally considered to be gambling or excessive leverage, they were originally designed for hedge purposes.

Options trading offers investors the opportunity to profit from volatility and protect their positions against steep price drops. These advanced strategies often involve multiple instruments and are also known as “structures”.

To hedge against losses due to unexpected price swings, investors rely on the “risk-reversal” options strategy. While the holder gains from long-term ownership of the call (buy), options, the cost of those options is covered by the sale or purchase option. This setup reduces the risk of ETH trading sideways, but it can still result in a modest loss if the asset trades lower.

Estimate profit and loss. Source: Deribit Position Builder

Although the trade above focuses on the Aug. 26 options only, investors will discover similar patterns with different maturities. Ether was trading at $1729 at the time of pricing.

The trader must first buy protection against a downside move by purchasing 10.2 Ethereum put (sell) $1500 options contracts. To increase the returns, the trader will then sell 9 ETH puts (sell) $1700 options contracts. For positive price exposure, the trader will need to buy 10 call options contracts (buy) at $2,200.

Remember that all options have an expiry date. Therefore, the asset’s price appreciation must occur within the set period.

Protected from a Price Drop Below $1,500

This options structure does not result in a gain or loss of $1,700 to $2,200 (up 27%) The investor bets that Ether’s price will rise to above this level on Aug. 26, at 8:00 AM UTC, and is able to make unlimited profits with a maximum loss of 1.185 ETH.

This investment would yield a net gain of 1.185 ETH if Ether prices rise to $2,490 (up 44%). A 56% pump to $2700 would result in an ETH 1.87 net gain. The only downside is the main benefit.

This options structure is free, but the exchange will need a margin deposit up to 1.185 ETH in order to cover any potential losses.

Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.

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