How Ethereum traders position themselves to avoid losses from near merger

How Ethereum traders position themselves to avoid losses from near merger

Some consider placing unhedged or hedged directional bets on the price of an asset as the most exciting trading strategy in the financial markets. And Ethereum (ETH) traders were doing just that before the project’s expected update, known as Merge.

Institutions seem to adopt an options trading strategy called “long throttle(Long Throttle), which is indifferent to the direction in which the cryptocurrency is moving, and aims to take advantage of the degree of price volatility or volatility.

Throttle involves buying Call (call) and put (put) options with similar expiration dates. Buying a call option – or the right to buy the underlying asset at a predetermined price – is like taking insurance against upward moves by paying a premium up front to the person selling the option. Buying a put option – or the right to sell an asset at a predetermined price – is like buying protection against a price drop. Thus, having both options protects against volatility.

“Block (big investment) traders are also starting to bet on higher volatility in ETH,” said Griffin Ardern, volatility trader at crypto asset management firm Blofin, who drew attention to the large number of stifling trades on the exchange. last 24 hours.

This type of strategy earns money when the price of the asset swings far enough in either direction to make the call or put a value higher than the total premium paid to purchase both options. The strategy loses money when the asset has a small divergence, which reduces the demand and option prices.

According to Ardern, the latest block trades indicate a growing interest in the Ether throttle, signaling confidence among veteran traders that volatility is about to explode.

The increased interest in volatile trading also indicates the maturity of the market and the influx of experienced traders in the industry. Bundled deals are large deals placed by institutions, usually broken down into smaller orders and executed through different brokerages or over-the-counter to ensure minimal impact on prices.

“They are willing to pay relatively higher costs to get potentially high returns,” Ardern said.

Block traders have created “bottlenecks” in options that expire on September 9-30 and October 28. Options that expire on the 30th of this month and the 28th of the following month will capture the market activity before and after the merger.

The chart, which was created based on information from Griffin Ardern, crypto platform Laevitas and Exchange Deribit and uploaded to CoinDesk, shows a trader buying 4,000 call contracts at a strike price of $3,000 and 4,000 short contracts with an exercise price of $800, both expiring on October 28.

The strategy will pay off if ETH settles above the $800-$3,000 range on October 28, making buying or selling more valuable than the initial cost per contract, which was $62.98. This amount is arrived at by adding the premium paid for a call option contract, $40.52, and paying it for a call option contract, $22.46. The total premium paid to purchase 4,000 buy and sell contracts is $251,920.

All premiums paid will be forfeited if ETH settles within this range on October 28, assuming the buyer holds the position until the settlement date. However, traders usually liquidate positions prior to expiration according to market conditions.

This can happen, for example, if there is a wave of volatility large enough to make the purchase or sale more valuable than the total cost immediately before or after the merger. In this case, the trader can liquidate positions and pocket the difference. If the merger turns out to be a disappointing event, the options prices will drop and the trader can cut their losses immediately by fighting long throttle.

It is quite clear that swing trading is complicated, although it seems easier than directional trading at first. It requires active management of the position and an in-depth knowledge of the “Greeks” – letters of the alphabet such as delta, gamma, theta, vega and ru – used as measures of performance in the options market.

This is why non-directional trading is best suited for experienced traders or institutions that have an ample store of knowledge and capital.

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