How Can Ethereum Options Traders Prepare for Migration to PoS?

Ethereum’s long-awaited transition away from proof-of-work (PoW) mining has recently been delayed again and is expected to happen 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 firm date yet, but we have definitely entered the final stage of Ethereum PoW." .”

To make PoW mining less attractive, an automatic increase in mining difficulty will come into effect around May. Dubbed a “difficulty bomb,” it would eventually make blocks “unbearably slow,” forcing an upgrade to a proof-of-stake (PoS) network.

Such news could negatively affect the price of ethereum, but it creates a huge opportunity for those betting on the efficiency and potential gains of faster, cheaper transactions.

While people can use futures contracts to leverage long positions, they also risk being liquidated if prices suddenly experience negative price moves ahead of the network upgrade. Therefore, a professional trader might opt for an options trading strategy like the "Long Butterfly".

By trading multiple call (buy) options on the same expiration date, you can gain up to 3.2 times your potential loss. Options strategies allow traders to profit from upsides while limiting losses.

It is important to remember that all options have a fixed expiration date, therefore, the price appreciation of the asset must occur within the stated 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 costs will vary, overall efficiency will not be affected.

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

To initiate the execution, the investor bought 14 Ethereum call options with a $3,500 strike price and simultaneously sold 21 contracts of the $5,000 call options. To complete the trade, one would buy 8 $7,000 ETH calls to avoid losing more than that.

Derivatives are traded with ETH as the contract price, quoted at $2,937.

Transaction ensures limited loss, possible gain of 3.2 ETH

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

Meanwhile, if the price falls below $3,500 on September 22, the maximum loss is 0.99 ETH. Therefore, the potential gain on the "buy butterfly" is 3.2 times the maximum loss.

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

It’s worth emphasizing that the only upfront fee required is 0.99 ETH, which is more than enough to cover even the largest losses.