Traders expect the ether rally to fizzle out as upcoming merge to proof-of-stake system will be a ‘sell the news’ event

• Ethereum is set for a big upgrade next month as it transitions to a proof-of-stake system.
• Ether has surged by more than 100% from its June low as anticipation builds for the upcoming merge.
• But the Ethereum merge could ultimately be a "sell the news" event for ether prices, according to Glassnode.

The highly anticipated Ethereum Merge that is expected next month could ultimately prove to be a "sell the news" event for ether prices, according to Glassnode.

The Ethereum blockchain is expected to transition to a more efficient proof-of-stake system next month, dubbed the Merge. The Merge will make it less energy intensive to mine the tokens, transitioning the world's second largest cryptocurrency away from the long-standing proof-of-work system.

As anticipation of the Merge builds among traders and investors, ether has led a rally in cryptocurrencies, soaring more than 100% from its June low of $880. And for now, that rally could continue based on options trading activity.

"Traders appear to be utilizing call options to bet on the ETH price into September," Glassnode said in a Monday note.

In fact, the anticipation is so big that for the first time in history, the current open interest of Ethereum options at $6.6 billion has surpassed bitcoin at $4.8 billion, indicating that all eyes are on ether heading into September.

According to Glassnode, September contracts for ether are mostly in calls, which give its holders the right to purchase the cryptocurrency at a pre-determined strike price. Buying a call is an expression of a bullish outlook for traders.

"Call options dwarf put options for size, with traders betting on ETH prices upwards of $2,200, with significant open interest even out to $5,000," Glassnode said. The large buy side demand for ether call options that expire in September has led to a "state of extreme bullish bias."

But looking past September, that bullish bias practically evaporates as demand for ether call options falls in October and the ether options market enters a period of backwardation, "suggesting traders are expecting the Merge to be a 'buy the rumor, sell the news' style event, and have positioned accordingly," Glassnode said.

"Post merge, the left tail is pricing in significantly higher implied volatility, indicating traders are paying a premium for 'sell-the-news' put option protection post-merge," Glassnode said.

Ultimately, the ether options market is pointing to big volatility ahead as anticipation builds for the upcoming Merge event. And that volatility could come with both upside heading into September, followed by immediate downside post the Merge, according to Glassnode.

Ether prices fell 1% to $1,887 on Friday as the cryptocurrency tests the all-important $2,000 resistance level.