Options Trading Strategy for Cryptocurrency
Scroll DownNow that it seems as if the cryptocurrency markets are shaking off a bearish streak, investors who base their decisions on technical analysis are starting to look at ways they can profit from Ethereum trades. The market has been at this inflection point several times in the past; this time around, however, traders are not overly optimistic, and they are more likely to resort to options in order to mitigate their risk.
The prospect of ETH/USD reaching $5,000 later this year is not shared by many analysts; nonetheless, there is enough enthusiasm for an Ethereum rally that may get closer to $4,400 over the next two months. With situations such as this one, many ETH traders turn to strategies such as Long Condor options, which can provide upside protection in case a strike price is not reached.
The Long Condor, also known as the Iron Condor, is a style of option trade that offers investors the opportunity to profit on a rising Ethereum price with only limited risk. As a trade, it entails purchasing the right to sell a set number of an underlying asset; this asset can be Ethereum, as was the case in the aforementioned example, but it can also be Bitcoin, which allows traders to take advantage of the market surge.
In this trade, an investor buys the option, which is worth a set amount, but only if the underlying asset surpasses a strike price. This may be the case with an ETH/USD, or ETH/BTC trade, for instance; both are subject to a certain amount of risk if the value does not pass the strike price.
The contract, known as a call option, makes the purchase worthwhile when the price of the asset spikes above a certain value; in the case of Ethereum, this is $5,000. In return, the investor only needs to pay the premium or value of the contract, which will increase in value if the price of Ethereum stays above $5,000. On the flip side, should the price fail to hit that number, the investor pays nothing.
Another aspect of the trade is that the investor must place a “notional” deposit in the underlying asset; this is typically in the range of several thousand dollars. In the example above, the investor purchases the right to purchase $1 million worth of Ethereum, which could be sold at a price that surpasses the $5,000 level; this would be similar to a “vanilla long" position in the futures market.
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