“Risk Reversal” Ethereum Merge Options Strategies For Invetsors
As the network transitions away from proof-of-work (PoW) mining, Ether (ETH) is at a critical juncture that could determine its future. Sadly, many new traders frequently fail to hit the mark when developing methods to maximize profits from future favorable occurrences. We have a few “Risk reversal” strategies for investors to follow in this Ethereum merge.
For instance, purchasing ETH futures contracts is a simple and inexpensive way to increase profits. Positions are frequently leveraged via perpetual futures, and profits can be readily multiplied by five. Therefore, why not employ inverse swaps? The threat of forced liquidation is the critical justification. The leveraged buyer forfeits their entire investment if the price of ETH declines by 19% from the entering point.
Ether’s volatility and significant price swings are critical issues. For instance, in 118 out of the 365 days since July 2021, the price of ETH dropped 19 percent from its beginning point within 20 days. Any long position with a 5x leverage will therefore have been forcibly closed.
The “risk reversal” options method used by professional traders
Cryptocurrency derivatives were primarily intended for hedging, despite the widespread belief that they are mainly utilized for gambling and excessive leverage.
Investors have the chance to profit from higher volatility and protect their positions from sharp price declines through the use of options trading. These more complex investing strategies, known as “structures,” typically involve multiple instruments.
Investors use the “risk reversal” method to protect losses from unforeseen price fluctuations. The holder gains by holding the call (buy) options, but the cost of those is offset by the proceeds from the sale of the put (sell) option. In other words, this configuration eliminates the risk of ETH fluctuating sideways, but it does involve a little loss if the asset declines.
Estimate profits and losses. Deribit Position Builder as a source
The trade above focuses solely on the options expiring on August 26, but investors will see comparable patterns utilizing other maturities. The price of Ether was set at $1,729 at the time.
The first step for the trader is to purchase put options for $1,500 on 10.2 ETH to safeguard against a downward fall. The trader will sell 9 ETH put $1,700 options contracts to net the profits above this amount. For favorable price exposure, the trader should finally purchase ten warranties for $2,200 call options. It’s crucial to remember that every option has a predetermined expiration date, so the asset’s price growth must occur within the given time frame.
— BitcoinAgile (@bitcoinagile) August 31, 2021
Investors are safeguarded against a price decline below $1,500.
Between $1,700 and $2,200, up 27 percent, there is neither a gain nor a loss due to this options arrangement. The investor is placing a wager that Ether will trade above that range on August 26 at 8:00 AM UTC, giving them exposure to infinite gains and a maximum loss of 1.185 ETH.
This investment would generate a net gain of 1.185 ETH, covering the maximum loss if Ether’s price surges toward $2,490, up 44 percent. Additionally, a 56 percent increase to $2,700 would result in a net profit of 1.87 ETH. The slight downside is the critical advantage for the holder. The exchange will demand a margin deposit of up to 1.185 ETH to cover any losses even though there is no fee connected with this options structure.