Cryptocurrency News

Here’s how traders use call options to increase their bitcoin holdings


Crypto traders are attracted by its huge growth in the market and attractive opportunities to make profit. However, not every investor is using volatility or generated leverage levels to gamble in derivatives exchanges.

In fact, fixed stocks typically account for half of the total price lock (TVL) on most decentralized finance (DFI) applications that focus on yield.

One reason for the surge in DeFi is despite Ethereum Network’s average fees exceeding $ 10 in May. Institutional investors are desperately demanding fixed income returns as traditional finance rarely offers more than 5% return. However, it is possible to earn up to 4% per month using bitcoin (B T c) Derivatives on low risk trades.

Non-investment grade bond yield. Source: US Federal Reserve

Note how non-investment grade bonds, far more risky than treasury bills, yield less than 5%. Meanwhile, the official inflation rate in the United States has been 4.2% for the past 12 months.

Paul Capelli, a portfolio manager at Galaxy Fund Management, Recently told Cointegraph that bitcoin’s “inelastic supply curve and deflationary issue schedule” makes it “a compelling hedge against inflation and bad monetary policies that can lead to devaluation of cash positions over time.”

Centralized services such as crypto.com, blockfy and nexo will typically receive 5% to 10% per year for fixed currency deposits. To increase payment, one needs to take a higher risk, meaning no less known exchange or intermediary.

Stablecoin yields on centralized services. Source: Loancan.io

However, one can get 2% weekly return by using bitcoin derivatives. For those instruments, liquidity currently sits in centralized exchanges. Therefore, the trader should take into account the counterparty risk while analyzing such trades.

Selling covered calls can become a semi-fixed income trade

The buyer of a call option can get bitcoins for a fixed price at a certain future date. For this privilege, an advance is paid to the call option seller. While the buyer typically uses this tool as insurance, sellers typically aim for semi-fixed-income trades.

Each contract has a set expiration date and strike price, so the potential profit and loss can be calculated in advance. This covered call strategy involves placing bitcoins and selling call options, preferably 15% to 20% above the current market price.

It would be unfair to call it a fixed income trade as this strategy aims to increase the bitcoin balance of the trader, but it does not protect against negative price swings for those measuring returns in terms of USD.

For a holder, this strategy does not add risk because the position of bitcoin will remain unchanged even if the price falls.

Bitcoin 4 june call option market. Source: Deribit

Given that bitcoin was trading at $ 37,000 when the above data was collected, a merchant could sell the $ 44,000 call option for June 4, which could mature in six days. Accumulating a 0.10 BTC margin should be sufficient to sell 0.30 BTC call option contracts, thereby obtaining 0.00243 BTC in advance.

Two results: high bitcoin volume or large USD position

There are essentially two results depending on whether bitcoin trades above or below $ 44,000 at 8:00 AM UTC on June 4. A $ 44,000 call option would be worthless for any level below this figure, so the option seller keeps the 0.00243 BTC advance payment. In addition to the 0.10 BTC margin deposit.

However, if the expiry value exceeds $ 44,000, the trader’s margin will be used to cover the price difference. At $ 6,000, the net loss is .011 bitcoin, so the margin has been reduced to .079 ($ 7.079). Meanwhile, at the time of the deposit, the 0.10 bitcoin margin was valued at $ 3,700.

In fact the covered call option seller would have made more money by holding 0.10 bitcoins from the beginning, as the price had risen from $ 37,000 to $ 46,000. Nevertheless, by receiving 0.00243 BTC advanced payment, bitcoin holdings will increase, even if the price is below $ 37,000.

A 2.8% gain in terms of bitcoin would be for any termination below $ 7,000, which is $ 36,000 to 14.8% when analyzing the deribit option prices.

The views and opinions expressed here are those of Author And do not necessarily reflect the views of Cointegraf. Every investment and trading move involves risk. You should do your research yourself while making a decision.