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24 October 2020

Here’s how to properly earn a DeFi sized yield trading Bitcoin options

Here’s how to properly earn a DeFi sized yield trading Bitcoin options


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When selling the calls against your long BTC you receive the call premium, which is the price the buyer pays for the option to buy BTC at the strike price specified in the call option contract.

Relationship of call premium to contract length and the difference between today’s price and the strike.

As shown above, the most lucrative covered call strategies will be the ones that have contract lengths greater than a year, strike prices equal to (or less than) today’s price, and are created when BTC volatility is highest.

You only ever lose the premium you paid for the call, but when the price of the asset is above your strike, you profit.

A covered call is a position made by going long an asset and short a call option on that asset, so the combined profit and loss looks something like the below.

When the asset price is higher than the strike price at expiration, the call gets exercised and you sell your asset to the buyer.

But when above we looked at essentially the best-case covered call we found that its annualized premium reached 34.66%.

This strike price is lower than today’s price for BTC, which is about $10,750 per BTC.

If an investor sells a call option with a strike price lower than today’s price (or the price the investor expects the asset to hold at day of expiry), they must be ready to sell your asset at that lower strike price.

Agreeing to sell at $8,000 when BTC is trading at $10,750, unless you have a real belief that the price at expiry will be below $8,000/BTC, is a negative outcome.

The major benefit of trading covered calls monthly is that investors reset their strike price every month.

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