After flirting with the $500 level a few weeks ago on the back on a broad market rally and DeFi exuberance, ETH fell more than 30% to trade as low as $320. It has bounced back since to $380, but we feel there are reasons to believe that this trend could continue and break above $400 again.
Looking at technicals, we have a channel that has formed and is currently crossing a support line. It is likely we could be exciting it very soon on the upside.
With the rapid rise and decline of ETH prices we saw in the last week, implied volatility exploded to reach 100% for 1 month expiring options. Since then volatility has been decreasing very fast to reach levels where we are more comfortable to go long. 10 days realized in sitting at 75% for information.
Over the last weeks, all attention in the crypto space was centred around Defi. With the success of Defi protocols based on the Ethereum blockchain the demand for ETH has risen sharply and the congestion of the network as well, with gas fees reaching all time high. Despite some quick disillusions around some tokens and a recent overall price correction, we see enthusiasm around DeFi not falling any time soon. The sector is very lively and probably the most innovative at the moment.
Last but not least, the derivative market on ETH has really matured. The open interest and daily volumes have grown considerably and is now comparable to the one on BTC at the beginning of the year. The liquidity is now decent and enable investors to enter and exit strategies at a minimum friction cost.
The 400/480 1/2 call spread 30th October 2020 expiry can be put on to play this rally. For a low 8$ of premium we have a max value of $80 for that spread, meaning breakeven point at $408 and $552, i.e. 7.85% and 45% form here. We would advise to take profit if we approach $450 and to close that spread at the latest at $500. The same spread can be put in November or December for even lower premium, but of course it would require a bigger short term move to reach its full premium, but on the other hand it offers the luxury of time..
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