Ethereum’s long-awaited transition away from proof-of-work (PoW) mining has recently suffered another delay and is expected to take place in the second half of 2022.
Ethereum developer Tim Beiko stated on April 13 that “it will not be in June, but probably in the next few months. There is no firm date yet, but we are definitely in the final chapter of PoW on Ethereum.”
An automated mining difficulty increase designed to make PoW mining less attractive is planned to go live around May. Known as the “difficulty bomb”, it will end up making blocks “excruciatingly slow”, forcing the upgrade to a proof-of-stake (PoS) network.
This news may have negatively impacted the price of Ether (ETH), but it creates an immense opportunity for those betting on the potential efficiencies and profits of faster and cheaper transactions.
Although one could use futures contracts to leverage their long positions, they risk being liquidated if a sudden negative price move occurs prior to the network update. Consequently, professional traders will likely opt for an options trading strategy such as the “long butterfly”.
By trading multiple call options for the same expiration date, profits of 3.2 times higher than possible losses can be achieved. An options strategy allows the trader to profit from rallies and limit losses.
It is important to remember that all options have a specific expiration date and, therefore, the revaluation of the asset price must occur during the defined period.
Using Call Options to Limit Losses
Expected returns using Ether options for the September 22 expiration are shown below, but this methodology can also be applied using different time frames. Although costs will vary, overall effectiveness will not be affected.
This call option gives the buyer the right to purchase an asset, but the seller of the contract receives negative (potential) exposure. The “long butterfly” strategy requires a short position using the $5,000 call option.
To initiate execution, the investor buys 14 Ether call options with a strike price of $3,500 while simultaneously selling 21 contracts of the $5,000 call option. To end the trade, 8 ETH contracts of the $7,000 call options would be purchased to avoid losses above that level.
Derivatives exchanges list the contracts in ETH and $2,937 was the price when this strategy was listed.
The trade secures a limited downside with a possible gain of 3.2 ETH
Using this strategy, anything between $3,770 (up 28%) and $7,000 (up 139%) produces a net profit – for example, a 40% price increase to $4,112 results in a profit of 1.1 ETH.
Meanwhile, the maximum loss is 0.99 ETH if the price goes below $3,500 on Sep 22. Thus, the “long butterfly” represents a potential gain 3.2 times greater than the maximum loss.
Overall, the trade produces a better risk-reward outcome than leveraged futures trading, especially considering the limited downside. It certainly looks like an attractive bet for those expecting the PoW migration sometime in the next five months.
It should be noted that the only required initial commission is 0.99 ETH, which is enough to cover the maximum loss.
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