Traders who believe Ethereum will reach $5,000 can use this low-risk option strategy to place a long bullish bet.
Being bullish on Ether (ETH) has recently paid off, as the token has gained 60% in the last 30 days. The explosive growth of decentralized finance (DeFi) applications is likely to have fueled institutional investor inflows, and the recent London hard fork implemented a fee burn mechanism that drastically reduced daily net issuance.
Although Ether is not yet a fully deflationary asset, the upgrade paved the way for Eth2, and the network is expected to abandon traditional mining and transition to proof-of-stake consensus in the near future. Ether will then be slightly deflationary as long as fees remain above a certain threshold and network staking remains high.
In light of the recent rally, there are still daily calls for Ether to rise above $5,000, but even the most bullish investors must recognize that a 90 percent increase from the current $3,300 level appears unlikely before the end of the year.
It would appear prudent to have a safety net in place if the cryptocurrency market reacts negatively to the potential regulation proposed by US Representative Don Beyer of Virginia.
Despite its early stages, the proposal for “The Digital Asset Market Structure and Investor Protection Act of 2021” seeks to formalize regulatory requirements for all digital assets and digital asset securities under the Bank Secrecy Act, classifying both as “monetary instruments.”
Limit your losses by limiting your upside.
Given the ongoing regulatory risks associated with crypto assets, devising a strategy that maximizes gains up to $5,000 by year’s end while simultaneously limiting losses to less than $2,500 appears to be a prudent and well-aligned decision that would prepare investors for both scenarios.
There is no better way to accomplish this than by employing the “Iron Condor” options strategy, which has been slightly skewed in favor of a bullish outcome.
The call option grants the buyer the right to purchase an asset at a predetermined price in the future. The buyer pays an upfront fee known as a premium for this privilege. In contrast, selling a call option creates a negative exposure to the asset price.
A put option gives its buyer the right to sell an asset at a fixed price in the future, which serves as a downside protection strategy. Meanwhile, selling this instrument exposes you to price appreciation.
The iron condor sells both call and put options with the same expiry price and date. The above example was created using Deribit’s ETH December 31 options.
The maximum profit is 2.5 times greater than the maximum loss.
The buyer would start the trade by shorting (selling) 0.50 contracts of the $3,520 call and put options at the same time. The buyer must then repeat the process for the $4,000 options. A protective put at $2,560 was used to protect against extreme price movements. As a result, depending on the price paid for the remaining contracts, 1.47 contracts will be required.
Finally, if the price of Ether rises above $7,000, the buyer will need to purchase 0.53 call option contracts to limit the strategy’s potential loss.
Although the number of contracts in the preceding example aims for a maximum gain of ETH 0.295 and a potential loss of ETH 0.11, most derivatives exchanges accept orders as low as 0.10 contracts.
If Ether trades between $2,774, which is 10.5 percent lower than the current $3,100 price, and $5,830 on December 31, this strategy will produce a net gain.
An investor can profit from the skewed version of the iron condor if the Ether price increase is less than 88 percent by the end of the year.