The number of investors interested in growing crops has grown significantly in the past six months as decentralized finance (DeFi) applications have become more prominent and easier to use.
This has resulted in countless liquidity pools offering annual returns (APYs) in excess of 1000%, and the total value recorded in DeFi contracts has grown to billions of dollars.
Bitcoin investors who wish to participate in the campaign can participate in increasing Defi’s profits by converting BTC to token formats such as Wrapped BTC (WBTC) and renBTC (RENBTC).
This allows BTC owners to interact with all ERC-20 tokens, but some analysts question the extent of decentralized storage of bitcoin behind these offerings; So it makes sense to explore more central solutions.
Although it is not possible to generate direct income from Bitcoin (BTC) deposits on these DeFi platforms, investors can still benefit from the centralized services. While it is impossible to find an APY higher than 12%, there are at least safer ways to generate income from “untapped” bitcoins.
Centralized services like Bitfinex, Poloniex, BlockFi, and Nexo typically generate 5% to 10% per year for BTC and Stable Deposits. To increase the return, you need to target a higher risk, and that does not necessarily mean there is a lesser known exchange or broker.
By trading BTC options on the Chicago Mercantile Exchange (CME), Deribit, or OKEx, an investor can achieve returns of 40% or higher.
Covered conversation strategy has its risks
Buyers of a call option can purchase Bitcoin at a fixed price on a specified future date. To obtain this privilege, this buyer makes a down payment to the Buy Option Seller. While a buyer can usually use this tool as insurance, sellers often enter into interest rate transactions.
Each contract has a pre-defined maturity date and redemption rate, so potential gains and losses can be calculated in advance. This covered call strategy consists of holding BTC options and selling similar volume call options at the same time.
It would be unfair to call this interest rate trading, as potential losses await when there is a significant drop in the price after the option has expired. However, when you open a trade, you can adjust this risk. It should be noted that reducing exposure will reduce profits.
The chart above shows a covered talk strategy that expires in November, and gives a return of 6% over two months, which equates to 41% annually. As mentioned earlier, a covered call can be a loss if the BTC price at expiration is below the strategy threshold.
Although yielding 6% by selling 0.5 BTC to $ 9K and 0.5 BTC on $ 10,000 call options, the strategy requires keeping BTC above $ 10,000 after November 27 to make a full profit. Anything below $ 8,960 would result in a loss, but it is 16.6% lower than the current bitcoin price of $ 10,750.
By selling these calling options, investors would receive 0.1665 BTC ($ 1,957 at the current price); Thus, a covered investor should buy the remaining 0.8335 BTC ($ 9,793) either through the popular futures markets. However, if the buyer is not willing to take this risk, the loss threshold may be lowered.
It is worth noting that most derivative exchanges allow trading in options from 0.10 BTC, excluding CME.
A return of 25% per annum can be achieved by selling November options of 0.5 BTC for $ 8,000 and 0.5 BTC for $ 9,000. By reducing the expected return, one might only see negative results below the USD 8,370 after November 27th, which is 22% lower than the spot price today.
Note how the $ 313 net income settled above the $ 9K results. To strike this balance, you need to buy $ 8,187 BTC in the futures or regular spot markets. The call option price will increase the remaining amount of 0.303 BTC ($ 3,257), but only the option seller will get the money up front.
Implicit volatility causes covered calls to reappear
Implicit volatility is an important indicator of risk in options markets, and it increases when traders face higher risks of sudden price fluctuations.