A covered call is an options strategy used to generate income through options premiums.

First, let's review what call options are. A call gives the buyer the ability to buy 1 BTC (per contract) at the strike price stated. So as a buyer, you can buy one $45k call, despite what BTC is trading at upon expiry. For example, if BTC is trading at $50k when your call expires, you are eligible to buy that single BTC for $45k.

The buyer of a call option pays a premium to the seller (lets say $500) because the seller is taking the risk. If the price of BTC is not above the strike price ($45k), the option will expire worthless and the seller will simply pocket the premium you paid for that call.

However, if BTC is trading at $50k, the seller is obligated to sell you one BTC at $45k. You have now bought a BTC $5k below market price. You are now able to go sell your BTC at market for $50k, netting you $5k minus the premium you paid ($500) for the option.

Let's get into the covered call strategy.

Assuming that you own 1 BTC (spot) and BTC is currently trading at $48k, you might sell 1 call at slightly above the current BTC price with a 30 day expiration, and the pay off would look something like the graph below:

Remember, since you are the seller, you collect a premium of $2,426. If BTC stayed pinned to $45k and never passed $50k at expiration you would simply pocket the premium, effectively earning you around .5% yield for the month.

Note: We are now in a low IV environment, if IV were to be higher you would collect a higher premium.

Let's assume another situation where BTC were to go to $55K, the breakdown is as follows:

  • Long 1 BTC: $55k (BTC price) – $45k (your entry) = $10k USD profit
  • Short 1 Call Contract at $50k = $50k (strike price) – $55k (current BTC price) = -$5k USD

Overall we are still up $5k in dollar terms.

Remember, we collected the $2,426 in premium, we can use that to pay off some of our $5k loss, bringing our total PnL to $7,426.

So far so good, however there is a downside. The downside to this trade is that if we would have just held BTC and not sold the Call we would be up 10k right now, which is almost 30% more, but that’s the trade off to earn yield.

The covered call trade is about giving up big upside to collect consistent yield on your BTC. There are many factors to be considered including your book, risk tolerance, and goals.

Outcomes also depend on market conditions, if you think BTC has topped or will continue trading sideways for awhile, this might be a good way to “synthetically mine” BTC.

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The PowerTrade Team