Traders Expect the Ethereum "Merge" Update to Cause ETH Price Volatility
Ether reaches a tipping point as the network moves away from proof-of-work (PoW) mining. Unfortunately, many novice traders tend to overlook this when creating strategies to maximize profits from potential positive events.
For example, buying ETH derivatives contracts is a cheap and simple profit maximization mechanism. Perpetual futures are often used for leverage positions, and you can easily increase profits by five times. So why not use a reverse swap? The main reason is the threat of forced liquidation. If the price of ETH drops by 19% from the entry point, the buyer with leverage loses all investments.
The main problem is the volatility of the ether and its strong price fluctuations. For example, since July 2021, the price of ETH has fallen by 19% from the starting point for 20 days in 118 out of 365 days. This means that any 5x long position with leverage will be forcibly terminated. Despite the consensus that cryptocurrencies are mainly used for gambling and excessive leverage, these instruments were originally intended for hedging.
Options trading provides investors with opportunities to protect their positions from a sharp drop in prices and even profit from increased volatility. These more advanced investment strategies usually involve more than one instrument and are commonly known as "structures".
Investors rely on the "reverse risk" option strategy to hedge losses from unexpected price fluctuations. The holder benefits from the fact that he participates in call (purchase) options for a long time, but the cost for them is covered by the sale of the put option (sale). Simply put, this setup eliminates the risk of sideways ETH trading, but it incurs moderate losses if the asset is traded.
The above trading is focused exclusively on options on August 26, but investors will find similar models using different maturities. Ether was trading at $1,729 when pricing occurred. It is important to remember that all options have a fixed expiration date, so the increase in the asset price must occur within a certain period.
Investors are protected from falling prices below $ 1,500
This option structure does not lead to any profit or loss in the amount of $1,700 to $2,200 (an increase of 27%). Thus, the investor is betting that the price of the Ether on August 26 at 8:00 UTC will be above this range, gaining access to unlimited profits and a maximum loss of 1,185 ETH. If the price of Ether breaks out at $2,490 (a 44% increase), these investments will result in a net profit of 1,185 ETH, covering the maximum loss. In addition, a pump of 56% to $ 2,700 will bring a net profit of 1.87 ETH. The main advantage for the holder is a limited disadvantage.
Despite the fact that there are no costs with this option structure, the exchange will need a margin deposit of up to 1,185 ETH to cover potential losses.
*Investing in cryptocurrencies involves increased risk. Do your own research before making a decision.
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