How can Ethereum options traders prepare for the migration to PoS?

Ethereum Foundation members expect the “merger” to occur before the end of the year, and savvy options traders will use this options strategy to profit.

Ethereum’s long-awaited transition away from proof-of-work (PoW) mining has recently been delayed again and is expected to occur in the second half of 2022.

Ethereum developer Tim Beiko said on April 13, “It won’t be June, but it may be in the next few months. There is no definite date yet, but we are definitely in the final stage of Ethereum PoW.”

In order to make PoW mining less attractive, an automatic increase in mining difficulty will begin to take effect around May. Known as the “difficulty bomb,” it will eventually make blocks “unbearably slow,” forcing an upgrade to a proof-of-stake (PoS) network.

Such news could have a negative impact on the price of Ethereum, but it creates a huge opportunity for those betting on the efficiency and potential gains of faster, cheaper transactions.

Although people can leverage long positions using futures contracts, they also run the risk of being liquidated if there is a sudden negative price movement before the network upgrade. Therefore, professional traders may choose option trading strategies like the "Long Butterfly".

By trading multiple call (buy) options on the same expiration date, it is possible to gain 3.2 times more than the potential loss. Option strategies allow traders to profit from upside while limiting losses.

It is important to remember that all options have a fixed expiration date, therefore, price appreciation of the asset must occur within the specified period.

Use call options to limit downside

Below are the expected returns using Ether options expiring on September 22, but this approach can also be applied on different time frames. While the cost will be different, the overall efficiency will not be affected.

Profit/loss estimate

Source: Deribit Position Builder

This call option gives the buyer the right to purchase the asset, but the seller of the contract faces (potentially) negative risk exposure. The "Buy Butterfly" strategy requires shorting the $5,000 call option.

To initiate the exercise, the investor purchased 14 Ethereum call options with a $3,500 strike price, while selling 21 contracts of the $5,000 call option. To complete the trade, one would buy 8 $7,000 ETH call options to avoid losses beyond this level.

The derivatives transaction uses ETH as the contract price, with a quote of $2,937.

The transaction ensures limited losses and a possible profit of 3.2 ETH

Using this strategy, any outcome between $3,770 (up 28%) and $7,000 (up 139%) would have resulted in a net profit — for example, a 40% price increase to $4,112 would have yielded a 1.1 ETH gain.

Meanwhile, if the price is below $3,500 on September 22, the maximum loss is 0.99 ETH. Therefore, the potential gain of “buying the butterfly” is 3.2 times the maximum loss.

Overall, this trade yields a better risk-reward ratio than leveraged futures trading, especially when considering the limited downside. For those looking forward to the PoW migration sometime in the next five months, this is certainly an attractive bet.

It is worth highlighting that the only upfront fee required is 0.99 ETH, which is more than enough to cover the biggest losses.