Ether (ETH) reaches a pass or break point as the network moves away from proof-of-work (PoW) mining. Unfortunately, many newbie traders tend to miss the mark when creating strategies to maximize gains on potential positive developments.
For example, buying ETH derivative contracts is a simple and cheap mechanism to maximize gains. Perpetual futures contracts are often used to leverage positions, and one can easily multiply the profits by five times.
So why not use reverse swaps? The main reason is the threat of forced liquidation. If the price of ETH drops 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 fallen 19% from its 20-day starting point in 118 days out of 365. This means that any 5x leveraged long positions will have been forcibly terminated.
How Professional Traders Play the “Risk Reversal” Options Strategy
Despite the consensus that crypto derivatives are primarily used for gambling and excessive leverage, these instruments were originally designed for hedging.
Options trading provides investors with opportunities to hedge their positions against sharp price declines and even profit from increased volatility. These more advanced investment strategies typically involve more than one instrument and are commonly referred to as “structures”.
Investors rely on the “risk inversion” options strategy to cover losses resulting from unexpected price movements. The holder benefits from a long call (call) position, but the cost of these is covered by selling a put (put) option. In short, this setup eliminates the sideways trading risk of ETH, but it results in a moderate loss if the asset is trading lower.
The above trade focuses exclusively on August 26 options, but investors will find similar patterns using different timeframes. Ether was trading at $1,729 when the price took place.
First, the trader must buy protection against a downside move by buying 10.2 ETH put (sell) $1,500 options contracts. Then, the trader will sell 9 contracts of $1,700 ETH put options to offset returns above this level. Finally, the trader must buy 10 call option contracts of $2,200 for positive price exposure.
It is important to remember that all options have a set expiry date, so the appreciation in the price of the asset must occur within the set period.
Investors are protected from a price drop below $1,500
This option structure results in no gain or loss between $1,700 and $2,200 (up 27%). Thus, the investor bets that the price of Ether on August 26 at 8:00 UTC will be above this range, exposing himself to unlimited profits and a maximum loss of 1.185 ETH.
If the price of Ether rallies towards $2,490 (up 44%), this investment would result in a net gain of 1.185 ETH, covering the maximum loss. Additionally, a 56% pump to $2,700 would yield a net profit of 1.87 ETH. The main advantage for the holder is the limited inconvenience.
Even though there is no cost associated with this options 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 Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.