How Traders Can Call Options to Increase Their Bitcoin Holdings

Expert and professional traders use covered call options as a method of low-risk to enhance their Bitcoin holdings. Traders of cryptocurrency get into the crypto market due to the lucrative opportunities of making huge profits it offers. However, there are only a few traders within the market that use degenerate levels of leverage for trading or seek volatility to take chances at derivatives exchange. In fact, most applications that are based on decentralized finance (DeFi) to focus on yields feature stablecoins that generally comprise 50% of the TVL (total value locked). In this article, we will take a look at some ways crypto traders call options to give a boost to their Bitcoin holdings.

Traditional finance rarely makes an offering of yields over 5%, resulting in institutional investors looking for income returns that are fixed. This is why DeFi took a flight in May last year, even though the median fees of the Ethereum network surpassed $10. However, traders can use Bitcoin (BTC) derivatives on trades that are low risk to earn as much as 4% a month.

Treasury Bills are much less risky than non-investment grade bonds. But even the latter do not yield more than 5%. Meanwhile, the last 12 months in the US have experienced an inflation rate of 4.2%. Cash positions can be devalued with time as a result of a deflationary issuance schedule and a supply curve that is inelastic as they make a hedge that is compelling against weak monetary policies and inflation.

The typical yield of most of the centralized services, including Nexo, BlockFi, and Crypto.com, has been 5% to 10% for a long time now when it comes to stablecoin deposits. Traders who wish to increase their payouts need to take higher risks. However, that does not mean trading with an intermediary or on an exchange that is less known to them. Bitcoin derivatives offer an attractive 2% per week yield to traders. Liquidity currently sits, for those instruments, at centralized exchanges. Therefore, traders, while evaluating such trades, should make sure to factor in the risk of the counterparty.

Selling a Covered Call as an Income Trade That is Semi-Fixed

In order to attain the privilege of acquiring Bitcoin on a certain future date at a fixed price, a call option buyer has to pay upfront for the seller of the call option. Sellers get into this trade for the purpose of getting semi-fixed income trades, while buyers usually leverage the instrument as insurance. Both the buyer and the seller can calculate losses and gains beforehand as every contract has a set strike price as well as an expiry date. This strategy includes holding Bitcoin and selling call options at a 20% higher rate than the current market price.

It is not a fixed-income trade because its goal is to give the Bitcoin balance of traders a boost. However, for the measuring yields in USD terms, it does not shield them from negative price fluctuations. For the traders holding Bitcoin, the strategy does not enhance their risk as the position of Bitcoin remains unaffected even in the case of a price drop.

At the time the above data was collected, Bitcoin was trading at 37,000. An investor may sell the 44,000 call option for 4^th June, expiring in six days, and in order to sell 0.30 BTC call option contracts, depositing a margin of a 0.10 BTC should suffice, receiving in advance 0.00243 BTC.

Larger USD Position or a Bitcoin Quantity That is Higher

There are two potential results that depend on Bitcoin either trading below or above 44,000 on 4^th June at 8:00 am UTC. For any level that is below this figure, the 44,000 call option will be of no value. Thus, the option seller holds to the 0.10 BTC margin deposit as well as the 0.00243 BTC advance payment. Although, the price difference will be covered by the use of the trader's margin if the price of expiry is over 44,000. Furthermore, the margin will be reduced to 0.089, and the net loss will be 0.011 BTC at 46,000. The value of the 0.10 BTC margin at the time of the deposit was 3,700.

It is true that had the covered call option seller kept the 0.10 BTC from the start, they would have earned more money. This is so as the price got up to 46,000 from just 37,000. But, their Bitcoin holdings will still increase even in the case of the price getting lower than 37,000 by receiving the 0.00243 Bitcoin advance payment. The 2.4% BTC profit will get yielded for any expiry that is under 44,000. Analyzing the option prices, it was estimated that the profit was 18.9% higher than the 37,000.

Advantages of Call Options in Crypto Trading

It is common for cryptocurrency traders to opt for a call option and not for long a futures contract. They do that when they believe that the price will go higher, and they want their risk to be fixed. You might be thinking that stop-loss when long a futures contract can also be used for the same purpose as well, and you are right. But, a call option, in comparison, has a significant advantage, which is that it cannot be liquidated or stopped. Traders who are long the futures contract can be stopped out in the case of the price going down even temporarily. This renders them unable to yield fruit from price increases that follow.

Slippage is another aspect that stop losses are prone to. Due to the thin orderbooks and highly volatile nature of the price fluctuations, the order of a stop-loss executes at a price that is lower than what was anticipated. This leads to a loss that is larger than was expected. Positions of call options are not equipped with this problem as the amount of loss can never exceed the paid premium and is limited to it.