Being bullish on Ether (ETH) over the past four months did not pay off as its price fell 44% from $4,600. The growth in decentralized finance (DeFi) apps that fueled the rally faded, in part due to network congestion and average transaction fees of $30 or more.
The cooling off period can also be attributed to excessive expectations such as the commission burn mechanism implemented in August 2021 with the London hard fork. After drastically reducing daily net issuance, investors concluded that Ether would become “ultra-solid money”.
The Ethereum network burned more ETH over the last 24 hours than was issued by both the PoW (eth1) and PoS (eth2) networks.
This is the first time this has happened since EIP-1559 went live less than 3 months ago.
ETH is ultra sound money
— sassal.eth (@sassal0x) October 28, 2021
Unfortunately, history shows that “sound money” requires several decades of reliable monetary policy. For example, the euro was launched to the public in 2002, despite periods of negative issuance in 2014 and 2019. However, its purchasing power has failed to hold up against strong assets like gold or real estate.
In light of the prolonged 4-month underperformance, anyone could buy some cheap $4,000 ETH call options for May for around $68. However, with 75 days to go, the odds of a 55% rally from the current $2,570 is slim.
It seems more prudent to bet on a positive price change, but be more selective with the target range. This is precisely how professional traders use the “iron condor” options strategy.
Reduction of losses by limiting the rise
A total of 10.2 million ETH has been staked in the Eth2 deposit contract (consensus layer) and investors seem confident in the proof-of-stake migration. Also, mitigating the biggest hurdle of the Ethereum network, namely scaling, could certainly send the price of ETH skyrocketing.
Finding a strategy that maximizes profits to $3,600 by May 27 seems prudent. On the other hand, hedging for a negative 7% yield is also prudent considering the uncertainty surrounding US President Joe Biden’s efforts to regulate cryptocurrencies.
Although the executive order signed on March 9 did not announce any restrictive measures, it certainly laid the groundwork for more focused federal oversight.
In that sense, the skewed “Iron Condor” options strategy fits perfectly in a slightly bullish scenario.
The “Iron Condor” sells both the call (bullish) and put (bearish) options at the same price and expiration date. The example above has been set using the May 27 ETH options on Deribit.
ETH profit zone is between $2,600 and $3,800
Investors must start the trade by selling 2 contracts of the $3,000 call and put options. The investor then has to repeat the procedure for the $3,200 options.
To protect against extreme price movements, a protective put option at $2,400 has been used. Consequently, 5.20 contracts will be necessary depending on the price.
Lastly, should the price of Ether shoot above $4,000, the buyer will have to purchase 2.10 call option contracts to limit the potential loss of the strategy.
The number of contracts in the example above is targeting a maximum profit of 0.63 ETH and a potential loss of 0.40 ETH. This strategy produces a net profit if the Ether price trades between $2,600 and $3,820 on May 27.
Using the biased version of the Iron Condor, an investor can profit as long as the Ether price increase is less than 49% at expiration.
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