Traders are hedging their bets ahead of the Ethereum merger

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Ether derivatives have skyrocketed over the past six weeks as The Merge has become a priority – and now traders are focusing on hedging their bets.

Ethereum’s transition to proof-of-stake is expected to take place early Thursday. The Block surveyed the crypto market ecosystem to gauge how traders are acting and reacting ahead of the event, which catapulted ether derivatives to new all-time highs in August.

LedgerPrime, a digital asset trading company and a subsidiary of crypto exchange FTX, shared in its bi-weekly market update noted that The Merge is on the minds of all traders, and the profile of This week’s options was dominated by the year-end call and close-in-the-money trade.

The report showed how the bull put spread and the bear call spread were the most traded structures leading to the upgrade. The bullish call is traded in anticipation of a moderate rise in price, while the bearish call spread is generally used when there is a possibility of moderate bearish movement, high volatility, or in order to mitigate risk.

Laura Vidiella of LedgerPrime told The Block on Wednesday that options traders mostly placed “free or low-cost hedges” and “sold calls and used premiums to buy put options.”

Vidiella noted that perpetual ether funding is negative, with many short-term hedges. According to Vidiella, traders are ready to accept negative funding rates over the next few days in order to take advantage of any potential Ether crashes – having most likely hedged during the August trading surge.

Vidiella also pointed out that macro factors will continue to affect the market in the near term, as evidenced by yesterday’s crash after the US CPI release.

The fusion thrust

In August, ether derivatives set new milestones.

Open interest in ether options initially exceeded bitcoin open interest, then ether futures volume eclipsed bitcoin for the first time.

Most metrics continued to rise in September and on Tuesday, open interest on the Chicago Mercantile Exchange (CME) hit its highest level since May.

Ether price soared throughout August, gaining as much as 18% one week before giving up those advances a week later.

However, Ether was not alone as most major cryptocurrencies fluctuated throughout the month, broadly in line with the broader financial markets.

Follow The Block’s live coverage of The Merge here.

© 2022 The Block Crypto, Inc. All rights reserved. This article is provided for informational purposes only. It is not offered or intended for use as legal, tax, investment, financial or other advice.

About the Author

Adam Morgan is The Block’s markets reporter. He’s been based in London for a year, initially freelancing and working for a start-up there before starting a fellowship at Business Insider. He tweets @AdamMcMarkets

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