Why Ethereum Derivatives Traders Are Deploying an Iron Condor Strategy

By Tarang Khaitan

Ethereum has fallen to $3,480, a 3% slip in the past 24 hours. Traders at Wintermute told Decrypt that ETH appears to be range-bound between $3,200 and $3,400 as derivatives traders are likely profiting from an Iron Condor strategy. The firm added that Bitcoin has been similarly range-bound between $63,000 and $65,000.

"Market consensus is these areas take importance as 'lines-in-the sand'," an analysts from the firm's trading desk told Decrypt, "and I'm seeing traders lean on them to define risk."

An Iron Condor is a direction-neutral options strategy where traders benefit from the underlying asset staying range-bound until the expiration of options.

It’s a relatively low-risk strategy that’s suitable for traders who expect low volatility in the Ethereum price. But because it involves buying and selling four different options contracts with the same expiration date, it requires precise timing to pull off.

The Wintermute analysts highlighted that the price range is an important area for derivatives traders, and a major swing in either direction could have a drastic impact on the price of ETH.

Ethereum’s open interest dropped to $11.5 billion this week, which indicates that traders believe major price swings in the asset are unlikely. That's for the short-term. But there are signs that traders expect upward movement in the coming months.

The analysts noted that yesterday, a large trader bought Ethereum options with a $4,000 strike price while paying a $12,054,100 premium. The expiration date for these option contracts is September 27. The trader could potentially profit to the tune of approximately $107 million if ETH witnesses an upswing, especially if it crosses the $4,000 mark.

The expiration date of these contracts is important, as the U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler has stated that U.S. spot Ethereum ETFs will go live sometime this summer.

Option contracts expiring between June 28 and July 5 have witnessed an increase of 6-8% in their implied volatility (IV). High IV indicates that buying options contracts is more expensive and poses a greater risk for the buyer. Additionally, these contracts are likely being bought in anticipation of commentary from the SEC regarding U.S. spot Ethereum ETFs.

Ethereum has seen some major positive developments over the course of the week.

In the past 24 hours, Bitwise has released a TV commercial for Ethereum ahead of spot ETFs. The firm minted the video as an NFT on the Ethereum blockchain.

Earlier this week, leading Ethereum developer Consensys announced that the SEC had closed its investigation into Ethereum 2.0 without filing any charges.

There are also signs that even without a start date for Ethereum ETFs to begin trading, institutional demand is starting to gain steam.

Pantera Capital Management LP is planning to invest $100 million in the Bitwise Ethereum ETF, the issuer noted in an SEC filing. A report based on data from research firm K33 indicates that Ethereum ETFs could potentially attract $4 billion in inflows within five months of their launch.

Edited by Stacy Elliott.

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