The “long butterfly” strategy for switching Ethereum to PoS

Here’s how to deal with Ethereum’s transition from PoW to PoS with a “long butterfly” strategy.

How to navigate Ethereum’s transition to PoS with a long butterfly strategy

Ethereum’s final switch from PoW to PoS, the so-called Merge, has been delayed again. 

In reality, this is only a slight delay compared to expectations, since the final date has not yet been decided. However, it was expected that it could be implemented by the end of June, but it will have to wait a few months longer. 

In general, news of such delays tends to have a negative impact on the price of ETH, so much so that it has fallen by 7% in the past two weeks. 

At the same time, they generate new opportunities for investors in the medium to long term. 

One such opportunity could be exploited by using a “long butterfly” strategy.

The use of derivative instruments

Those wishing to speculate in the medium to long term often use futures contracts to open long positions with leverage, but these could end up being liquidated in the meantime in the event of sharp negative price movements, which could theoretically still occur between now and the Merge. 

An alternative would be to trade multiple call (i.e. buy) options for the same expiry date, so that profits of up to 3 times the potential loss can be made. 

In this way, it is possible to take profits in the medium to long term thanks to the possible growth of the price, but at the same time limiting losses in the event of temporary collapses.

The term “butterfly” indicates a strategy based on the simultaneous purchase and sale of options on three different price levels of the underlying asset, all with the same expiry date.

The strategy can be executed on both short and long positions, using call options or put options. 

The “long butterfly” involves betting on a long position at times of low volatility, and can be achieved either with a combination of call options or with one of put options. 

In the absence of high price volatility of the underlying asset, this strategy allows the maximum pay-off to be obtained when the price of the underlying asset reaches the median price, while it produces a limited loss when the price of the underlying asset deviates from the median price. 

Using this strategy, any price between the minimum and maximum identified by the speculator will still produce a net profit, while in the event of a loss this would be very small. 

Theoretically, it can offer a profit potential three times greater than the losses.

However, this strategy is obviously only suitable for those who are familiar with the operation of options, a high-risk financial derivative.

In addition, this type of strategy is more suitable for medium-term speculators than for long-term investors. In general, long-term investors simply buy and hold, without making their lives more complicated. In this way, they risk more financially and less practically. 

Complex strategies such as these reduce financial risks, but increase practical risks if they are carried out by people who are not familiar with how these complex derivatives work. 

Having said that, it must be said that there is no certainty that the price of ETH will rise over time, although several analysts think that it could rise after the Merge.