Here’s how Ether options traders could prepare for the proof-of-stake migration


Ethereum’s long-awaited transition away from proof-of-work (PoW) mining recently suffered another delay and is expected to happen in the second half of 2022.

Ethereum developer Tim Beiko stated on April 13 that “it won’t be June, but probably a few months from now. No firm date yet, but we are definitely in the final chapter of PoW on Ethereum.”

An automated increase in mining difficulty designed to make PoW mining less attractive will go live around May. Known as the “difficulty bomb,” it will eventually make blocks “excruciatingly slow,” forcing the upgrade to a proof-of-stake (PoS) network.

Such news could have had a negative impact on the price of Ether (ETH), but it creates an immense opportunity for those betting on the efficiency and potential profits of faster and cheaper transactions.

Although one could use futures contracts to take advantage of their long positions, they risk being liquidated if a sudden negative price movement occurs prior to the network update. Consequently, professional traders will most likely opt for an options trading strategy such as the “long butterfly”.

By trading multiple call options for the same expiration date, you can make a profit of 3.2 times the potential loss. An options strategy allows a trader to profit from the upside while limiting losses.

It is important to remember that all options have a set expiration date and, as a result, the asset price appreciation must occur during the defined period.

Using call options to limit downsides

Below are the expected returns using Ether options for the September 22 expiration, but this methodology can also be applied using different time frames. While costs will vary, overall efficiency will not be affected.

Estimation of profits and losses. Source: Debit Position Generator

This call option gives the buyer the right to acquire 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, one would buy 8 ETH contracts of the $7,000 call options to avoid losses above that level.

Derivatives exchange price 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

With this strategy, anything between $3,770 (an increase of 28%) and $7,000 (an increase of 139%) generates 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. Therefore, the “long butterfly” is a potential profit of 3.2 times greater than the maximum loss.

Related: Altcoin Roundup: Analysts Give Their Opinion on Impact of Ethereum Merge Delay

In general, trading produces a better risk-reward outcome than leveraged futures trading, especially when the limited downside is considered. It certainly looks like an attractive bet for those hoping for the PoW migration at some point in the next five months.

It is worth noting that the only initial fee required is 0.99 ETH, which is enough to cover the maximum loss.

The views and opinions expressed herein are solely those of the Author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should do your own research when making a decision.