Ethereum’s upcoming London hard fork could provide a perfect entry point for bullish ETH options traders.
The Ethereum network will undergo a major upgrade on Aug. 4, as the long-awaited London hard fork is expected to launch at block 12,965,000. The transition is part of a roadmap leading to the Ethereum 2.0 release, which aims to migrate the network to a proof-of-stake consensus mechanism.
By no longer depending on the intense energy-consumption mining, the main goal is to drastically increase the network’s capacity by using parallel processing, also known as sharding.
The upcoming London upgrade will implement the critical Ethereum Improvement Proposal EIP-1559, making Ether (ETH) gas costs more predictable. This controversial change includes a transaction fee burn process which could potentially turn Ether into a deflationary asset.
For the last month, Ether’s price has been in a bearish rut even though the price recovered well from the drop to $1,500, but traders are still wary about opening positions. For the current type of price action, options strategies provide excellent opportunities for investors with a narrow-range target for an asset.
For example, using leveraged futures contracts could be a solution for a scenario where one expects a 20% price increase, but limiting the downside would require a tight stop loss. In a nutshell, the risk-reward usually doesn’t pay off on volatile markets.
Let’s investigate how the Long Butterfly options strategy can give traders an edge in tightly wound markets.
Trading options can help investors avoid liquidations
Using multiple calls (buy) options can create a strategy that allows gains that are 3 times higher than the potential loss. The long butterfly strategy allows a trader to profit from the upside while limiting losses.
It is vital to remember that all options have a set expiry date, and as a result, the asset’s price appreciation must happen during the defined period.
Below are the expected returns using Ether options for the Aug. 27 expiry, but this strategy can also be applied using different time frames. Although the costs will vary, the general efficiency will not be affected.
This call option gives the buyer the right to acquire an asset, but the contract seller receives (potential) negative exposure. This is why the Long Butterfly strategy opens a short position using the $2,800 call option.
To execute the order, the investor buys 3 Ether call options with a $2,400 strike while simultaneously selling 4 of the $2,800 calls. To finalize the trade, they have to buy 1 Ether of the $4,000 call options to create upside protection.
Derivatives exchanges price contracts in ETH terms and $2,366 was the price when this strategy was quoted.
The prize is 3-to-1 gains with limited downside
In this situation, any outcome between $2,485 (5% gain) and $3,620 (53% gain) yields a net profit—for example, a 15% price increase to $2,720 results in a 0.25 Ethernet gain.
Meanwhile, the maximum loss is 0.105 Ether if the price is below $2,400 or above $4,000 on Aug. 27.
The appeal of the butterfly strategy is a potential 0.32 Ether again at $2,820, which is 3 times more significant than the maximum loss. Overall, the trade yields a much better risk-to-reward outcome versus leveraged futures trading when considering the limited downside.
Options strategies involving multiple strikes provide a decent upside for bullish traders seeking exposure to Ethereum’s London hard fork on Aug. 4. The only upfront fee required is 0.105 Ether, which is enough to cover the maximum loss.