Being bullish on Ether (ETH) over the past four months has not paid off as the price fell 44% from $4,600. The growth of the decentralized financial (DeFi) applications that fueled the rally faded, in part due to network congestion and average transaction costs of $30 and above.
The cooling off period can also be attributed to excessive expectations such as the fee burn mechanism implemented in August 2021 with the London hard fork. After drastically reducing daily net issuance, investors came to the conclusion that Ether was going to become “ultrasound money.”
The Ethereum network has burned more ETH in the past 24 hours than has been spent 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 ultrasound money
— sassal.eth (@sassal0x) October 28, 2021
Unfortunately, history shows that “hard money” requires reliable monetary policy for several decades. For example, the euro was launched to the public in 2002, despite periods of negative issuance in 2014 and 2019. Yet its purchasing power has not held up against hard assets such as gold or real estate.
Case-Shiller US House Price Index/EUR (orange, left) & gold/EUR (blue). Source: TradingView
In light of the prolonged 4-month underperformance, one could buy cheap ultra-bullish call (bull) $4,000 ETH options at $68 before May. With 75 days to go, the probability of a rally is 55% however small compared to the current $2,570.
It seems wiser to bet on a positive price change, but be more selective in your target range. That’s exactly how professional traders use the “iron condor” option strategy.
Less losses by limiting the upside potential
A total of 10.2 million ETH has been staked in the Eth2 (consensus layer) deposit contract and investors appear to be confident in the proof-of-stake migration. In addition, reducing the Ethereum network’s biggest hurdle, which is scaling, could undoubtedly send ETH prices skyrocketing.
It seems wise to find a strategy that maximizes profits up to $3,600 on May 27. On the flip side, it’s also wise to hedge against a 7% negative return given the uncertainty surrounding US President Joe Biden’s crypto regulatory efforts.
While the executive order signed on March 9, did not announce any restrictive measures, it undoubtedly laid the foundation for more focused federal oversight.
In that sense, the skewed “Iron Condor” options strategy fits perfectly into such a mildly bullish scenario.
Ether options Iron condor skewed strategy returns. Source: Deribit Position Builder
The “Iron Condor” sells both the call (bull) and the put (bear) options at the same expiration price and date. The example above was set up using the May 27 ETH options at Deribit.
ETH Profit Zone is between $2,600 and $3,800
The investors have to initiate the trade by shorting (selling) 2 contracts of the $3,000 call and put options. Then the trader has to repeat the procedure for the $3,200 options.
To protect against extreme price movements, a protective put of $2,400 has been used. Depending on the price, 5.20 contracts are therefore required.
Finally, in case the price of Ether goes above $4,000, the buyer must acquire 2.10 call option contracts to limit the potential loss of the strategy.
The number of contracts in the example above aims for a maximum ETH 0.63 gain and a potential ETH 0.40 loss. This strategy will yield a net profit if Ether trades between $2,600 and $3,820 on May 27.
Using the skewed version of the Iron Condor, an investor can profit as long as the Ether price rise is below 49% at maturity.
The views and opinions expressed here are solely those of the writer and do not necessarily reflect the views of Coin-Crypto. Every investment and trading move involves risks. You should do your own research when making a decision.