As we’ve been having conversations with all kinds of players within the cryptosphere, we’ve noticed Index Fund managers as well Miners who are long-only are looking for additional sources of income.
This piece will be to educate them in a potential CALL WRITING strategy that can satisfy their need for additional income. When entering a CALL WRITING program, one would typically sell the 20 to 30 delta out-of-the money calls somewhere between 3–6 months out. If the program outcome is successful, a fund will increase its yield by collecting the option premium. Let us walk through the potential trade and its outcomes:
Assume you have a cost basis of $4,500 for your BTC. We would look at the BTC June (6/25/19) $6,000 Calls that are worth roughly $200.
- If the underlying stays flat
- Do nothing, sit back, and enjoy collecting the premium
- At expiration (6/25/19), your cost basis would become $4,300 (original basis — premium = new basis)
- Next Trade: analyze volatility curve and target appropriate calls to sell
- If the underlying sells off to $2,500 (hypothetical)
- You can ‘roll’ your short calls to a lower strike to increase the premium income making up for losses in the underlying asset.
- Sell the $4,500 Call and buy back the $6,000 Call for a net spread of $100 ($100 is an assumption and would have other factors to dictate that price: time, vol, BTC price etc.)
- At expiration (6/25/19), your cost basis would become $4,200 (original basis — total premium = new basis)
- If the underlying rallies towards $6,000 (hypothetical)
- You should roll the short calls ‘up-and-out’ (to a higher strike and a further month in the calendar year)
- Hypothetically, we would try to buy back the June $6000 calls and sell December calls (maybe $9,000 strike) for the same premium.
- The cost basis would remain the same @ $4,300, however you would not get called out of your BTC length if June settled above $6,000
When the premium on the short calls are miniscule, you can decide to buy them back, or let them expire. After this decision is made, you can start this process over and sell more calls to continue lowering the cost basis of your BTC.
The risk to this strategy is that you are short calls that, if end up in-the-money, can be exercised — meaning you would have to deliver your BTC to the call purchaser. To prevent this from happening one should be rolling the calls ‘up-and-out’. If the opportunity to do this is missed (let’s say BTC gapped from $4,000 to $8,000 overnight), you would end up cutting your profits short.
If this income generating program is something you would consider establishing, please reach out to us and let us know so we can hop on a call to discuss further