I recently noticed an interesting article on Cointelegraph explaining how investors can earn 41% APY on their bitcoins without switching to the RMB or WBTC.

In the article, the author provided a detailed example of how to leverage Bitcoin (BTC) stocks by investing in options markets rather than decentralized financing applications (DeFi).

While we support this particular strategy, some of the explanations provided in the article are confusing and not helpful, so I want to add some clarity regarding how best to implement this strategy.

How do covered calls work?
In the article, the author describes a covered communication strategy, which consists of “holding options to buy BTC and sell at the right volume at the same time.”

When you sell a call for your long BTC, you receive a call bonus, which is the price the buyer pays to buy BTC at the repurchase rate specified in the call contract. In this case, the profitability of the covered calling strategy depends on the amount of premiums you can make.

Choice awards are difficult to understand, and it is worth noting that Myron Scholes and Robert Merton were awarded the Nobel Prize in 1997 for finding a reliable way to praise them. But in general, the premium increases when the contract duration is longer, when the difference between the current price and the repurchase price is smaller, and when the volatility of Bitcoin is higher.

picture

The relationship between the call premium, the contract period, and the difference between the day’s price and the strike. Source: Ryan Anderson
The relationship between the call premium, the contract period, and the difference between the day’s price and the strike. Source: Ryan Anderson

As explained above, the most profitable covered call strategies are those with a contract longer than one year, execution prices equal to (or less than) the current price, and are created when Bitcoin’s volatility is higher.

At the time of writing, the Call option, which expires in June 2021 and is withdrawn at 10,000 BTC, offers a 34.66% annual premium. This is considering that the volatility of BTC these days is very low compared to the date.

However, it is important to be aware of the risks associated with various complex conversation strategies.

An easy way to visualize the risks you are exposed to when trading options is to look at the gains and losses in your position depending on where the BTC price expires on the day the contract expires.

Compared to the long arrow, that’s a long call because your shortcomings are limited. You only lose the premium you paid for the call, but when the asset’s price exceeds your strike, you win.

A covered call is a position that is opened by an asset for a long period and short of that asset, so the overall result looks like this.

Exposure appears as an active long position with an unlimited drawback up to the option price.

When the price of the asset is higher than the purchase price at the expiration date, the call is executed and the asset is sold to the buyer.

Since the investor always owns the asset, this is not a loss of profit or loss, so the possibility of an increase in the asset’s value is limited.

Problems with previous sentences
Here we encounter article design issues on how to trade options. The author suggests that when compared to DeFi-based returns:

“Trading BTC options on the Chicago Mercantile Exchange (CME), Deribit or OKEx allows an investor to comfortably achieve returns of 40% or higher.”

But when we looked above, in fact, the best conversational option, we found the annuity to be at 34.66%. So what’s the difference?

The author relied the 40% figure on a contract that expires at the end of November 2020 with a $ 9,500 strike. This repurchase price is lower than the current BTC price, which is around $ 10,750 per bitcoin. According to the author:

“As mentioned earlier, a covered call can result in losses if the BTC price at expiration falls below the strategy threshold … Any level below $ 8,960 will result in a loss, but 16.6% below the current level of $ 10,750. “.

Unfortunately, this is fundamentally a misconception about covered calls. If an investor sells a Call option at a repurchase price lower than the current price (or the price an investor expects for the asset on the expiration date), he or she should be willing to sell the asset at a lower purchase price.

Source: CoinTelegraph

LEAVE A REPLY