Want to chase the ETH rally? — You should consider this option trade.

Buy Aug 26 expiry, 1600 strike call, with an up-and-out trigger at 2100, for 2.5%. The equivalent vanilla option costs 9.5%.

Orbit Markets
3 min readJul 18, 2022

Crypto rallied strongly over the weekend with ETH outperforming on the back of the Merge story. As confidence restores, the current strength could have legs over the coming weeks. What’s the best trade from here?

You can buy perps, but you will run large downside risks. Should any negative news hit the wire again, or the Merge disappoint, you will suffer significant losses.

You can buy call options which eliminate downside risks, but they are very expensive. With ETH spot at 1500, Aug 26 expiry 1600 strike call costs a whopping 9.5%.

Is there a cheaper trade? Yes, up-and-out options.

An up-and-out option gives traders the right to buy ETH at a pre-determined strike. This part is the same as a plain vanilla option. The difference lies in the knock-out mechanism which consists of a trigger above the strike, which would kill the option if touched. Adding a knock-out feature significantly cheapens the cost of the option.

While the Merge story is appealing and likely to propel the price further higher, there are other factors weighing on the price, potentially slowing the move and capping the upside:

  • Potential disappointment of the Merge
  • Still fragile risk sentiment and tough macro environment.
  • Selling pressure from Mt. Gox, Celsius and miners.

An up-and-out option suits perfectly such a scenario, i.e. the price will move up within a limited range but not exceed the trigger level. Traders with a moderately bullish view, expecting a gradual shift, but not a squeeze can use up-and-out options. The worst-case scenario remains that the option value goes to zero if spot either hits the trigger or ends below the strike, in which cases traders just lose the premium.

For example, with ETH spot at 1500, Aug 26 expiry 1600 strike call costs 9.5%, but if you add a up-and-out trigger at 2100, that premium goes down to just 2.5%. As long as spot never touches 2100, you get the same benefits of the vanilla option except that you paid only a third of the price.

About OrBit

OrBit Markets is an institutional liquidity provider of exotic options and structured products in digital assets. Founded by a strong team of leaders in trading and computer science, and backed by Matrixport and Brevan Howard Digital, OrBit brings its expert know-how in options to the crypto market. Headquartered in Singapore, OrBit serves institutions across CeFi, DeFi and TradFi looking for more sophisticated investing and hedging solutions in digital assets. For more information, visit www.orbitmarkets.io.

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