Strategy can help more optimistic traders with Ethereum and looking for low risk options

It would seem more prudent to have a safety net if the cryptocurrency market reacts negatively to the potent regulation coming from the United States Representative Don Beyer of Virginia.

The optimism about Ether (ETH) paid off as the token has gained 60% in the last 30 days. The spectacular growth of decentralized finance (DeFi) applications fueled the influx of institutional investors, and the recent hard fork London implemented a fee-burning mechanism that dramatically reduced daily net issuance.

While Ether is not yet a fully deflationary asset, the update has paved the way for Eth2, and the network is expected to abandon traditional mining and enter the proof-of-stake consensus soon. Ether will be slightly deflationary as long as rates remain above a certain threshold and the level of network staking.

In light of the recent rally, there are still daily orders for Ether to rise above $5,000, but certainly even optimistic traders know that a 90% rise from the current $3,300 level looks unlikely before year-end.

It seems more prudent to have a safety net if the cryptocurrency market reacts negatively to potential regulation from US Representative Don Beyer of Virginia.

Despite being in its early stages, the proposed “Digital Asset Market Structure and Investor Protection Act 2021” seeks to formalize regulatory requirements for all digital assets and digital asset securities under the Banking Secrecy Law, ranking both as “monetary instruments”.

Reduce losses by limiting advantages

Given the persistent regulatory risks that exist for cryptographic assets, finding a strategy that maximizes earnings up to $5,000 at the end of the year while limiting losses below $2,500 seems like a prudent and well-aligned decision that would prepare the investors for both scenarios.

There is no better way to do this than to use the “Iron Condor” options strategy, which has been slightly skewed for an optimistic result.

ETH Options – Iron Condor distorted strategy. Source: Derbit Position Builder

A call option gives the buyer the right to purchase an asset at a fixed price in the future. For this privilege, the buyer pays an upfront fee known as the premium. Selling a call option, on the other hand, creates negative exposure to the asset’s price.

A put option offers the buyer the privilege of selling an asset at a fixed price in the future, a fall protection strategy. Meanwhile, selling this instrument offers exposure to price increases.

Iron Condor basically sells call and put options at the same price and expiration date. The example above was defined using the December 31 ETH options in Deribit.

The maximum profit is 2.5x greater than the potential loss

The buyer would start trading by simultaneously selling short 0.50 contracts of the $3,520 call and put options. The buyer then needs to repeat the procedure for the $4,000 options. To protect against extreme price movements, a hedge placed at $2,560 was used. Consequently, 1.47 contracts will be needed depending on the price paid for the other contracts.

Lastly, just in case the Ether price exceeds $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 example above targets a maximum gain of 0.295 ETH and a potential loss of 0.11 ETH, most derivatives exchanges accept orders of up to 0.10 contracts.

This strategy generates a net gain if Ether trades between $2,774, which is 10.5% below the current price of $3,100, and $5,830 on December 31st.

By using the distorted version of the iron condor, an investor can profit as long as the Ether price increase is less than 88% at the end of the year.

The views and opinions expressed herein are those of the actor and do not necessarily reflect the views of the Cointelegraph. Every investment involves risk; conduct your own research before making a decision.

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