It is no longer news that Ethereum has made available everything necessary to move from the current blockchain network to the latest beacon chain upgrade, the ETH 2.0. By implementing this upgrade, Ethereum moves from being the current Proof-of-Work (POW) blockchain network to the new Proof-of-Stake (POS) network. The earnestly awaited upgrade popularly referred to as the ‘merge’ was scheduled to happen in the first quarter of the year 2022. But this date has since been shifted indefinitely, and no official date has been released yet. However, Tim Beiko, the main Ethereum developer, has assured users that although the merge has been delayed, and has raised a question in everyone’s mind, when is the Ethereum merge? — the last days of the PoW protocol on the Ethereum chain are already here.
Despite the delay, a programmed upswing in mining difficulty on Ethereum is set to be launched in May. This is done to reduce the attraction for mining on the network, discouraging many people from mining on the network. This program is called the ‘difficulty bomb.’ Once activated, the process of mining new blocks will be extremely slow. Thus, forcing the upgrade of the Ethereum blockchain to function using a Proof-of-stake mechanism.
This forthcoming development is set to affect a lot of things on the network, including Ethereum options trading. The Ether price is also predicted to suffer a negative impact, leading to a major downward slope. Although it seems like a loss for the network, in the long run, it will serve to be beneficial as the migration will lead to cheaper, faster, and more efficient transactions.
What Exactly Are Options?
Options can be plainly explained as a contract that bestows on a buyer the right, not necessarily the obligation, to trade or buy an existing asset at a precise value or price ahead of a particular date, also known as the expiration date. Options have reasonably lower risks and costs, and they are an excellent method or solution for the trading of digital assets. An options trader can predict or foretell the future value of an underlying asset which can then be paid for in fiat or digital currency. For example, an options trader tracks the Ether price and buys Ethereum options which are paid for in fiat or crypto.
There are two major types of options, namely the call and put options. The ‘call’ option confers on a buyer the right to purchase an asset, while the ‘put’ option confers on a seller the liberty to trade an asset.
It should be noted that every option has a fixed expiry or expiration date. This is when the option loses its value and is no longer valid. For an option buyer to earn or gain, the asset’s price must increase within the given time frame, or else he will end up having a loss.
Besides Ethereum options trading, futures contracts can also be used by investors to influence and sustain their long-standing positions on the Ethereum network. However, this poses a great risk of liquidation if there is an abrupt drop in price before the upcoming network upgrade.
As a result of these possibilities, expert options traders make use of a technique known as the long butterfly.
Impact Of The Merge: How To Prepare
Even though the question, ‘when is the Ethereum merge?’ is on everyone’s lips, both critics and investors alike, there are radical changes that will accompany the eventual upgrade of the Ethereum network blockchain. These changes will lead option traders to find ways to prepare and adapt to the upgrade.
According to the latest options trading news, a major technique that can help options traders is the long butterfly technique.
This strategy involves securing a short-term position using a $5,000 call option. To execute the process, the buyer makes a purchase of 14 Ether call options at the rate of $3,500 and at the same time sells 21 units of the $5,000 call option. After this, the buyer buys eight units of $7,000 call options to prevent losses if the price gets that high.
Using the above strategy, any level the price reaches between the range of $3,770 and $7,000 will result in a net profit in varying percentages for the investor. For instance, if the option price reaches $4,112 (which is a 40% gain from the original $3,500 price) before expiry, the investor will have a gain of 1.1 Ether coins.
On the flip side, if the option’s price falls lower than the original $3,500 at expiry, the maximum loss incurred by the investor is only 0.99 Ether. It should be noted that a fee of 0.99 Ether, known as the premium fee, is required prior to the purchase of the options. As a result, if an option loses its value at expiry, only the premium fee is forfeited by the buyer.
The main aim behind the long butterfly technique is to help the buyer make a potential interest 3.2 times above the possible loss.
This strategy better covers possible risks than futures contract trading.
The impending migration to the Proof-of-stake protocol will cause a major shift in the running process of the Ethereum network. Options traders have to prepare adequately ahead of the merge to avoid being caught off guard, which is the point of this article.
Though the principal Ethereum developer hasn’t ascertained the exact time the merge will finally happen, the crypto ecosystem is eagerly waiting to benefit from the advantages that come with the merge.
Even as this upgrade is right around the corner, Redot still remains an active exchange for trading ETH.
What are your thoughts? How else do you think options traders can adapt to the upcoming merge?