Trading On margin

This is how traders use call options to increase their Bitcoin holdings

Crypto traders are drawn to the market by its explosive growth and lucrative opportunities to make profits. However, not all investors seek volatility or use degenerate levels of leverage to bet on derivatives exchanges.

In fact, stablecoins are typically half of the Total Locked-In Value (TVL) on most Decentralized Finance (DeFi) applications that focus on returns.

There’s a reason DeFi has exploded despite the Ethereum network’s median fees surpassing $ 10 in May. Institutional investors are desperate for bond yields, as traditional finance rarely offers yields above 5%. However, it is possible to earn up to 4% per month using Bitcoin (BTC) derivatives on low risk transactions.

Yield on non-investment grade bonds. Source: US Federal Reserve

Notice how even lower quality bonds, much riskier than Treasuries, pay less than 5%. Meanwhile, the official inflation rate in the United States over the past 12 months stood at 4.2%.

Paul Cappelli, portfolio manager at Galaxy Fund Management, recently told Cointelegraph that Bitcoin’s “inelastic supply curve and deflationary issuance schedule” make it a “compelling hedge against inflation and bad monetary policies that could lead to a devaluation of cash positions over time ”.

Centralized services like, BlockFi, and Nexo will typically earn 5% to 10% per year for stable deposits. To increase the payout, you have to look for higher risks, which doesn’t necessarily mean a lesser-known exchange or intermediary.

Stablecoin reports on centralized services. Source:

However, one can achieve a weekly return of 2% using Bitcoin derivatives. For these instruments, liquidity currently resides in centralized exchanges. Therefore, the trader should take into account the counterparty risk when analyzing these transactions.

Selling a covered call option can become a semi-fixed income transaction

The buyer of a call option can acquire Bitcoin for a fixed price on a specified future date. For this privilege, the seller of call options is paid in advance. While the buyer typically uses this instrument as insurance, sellers typically aim for semi-fixed income transactions.

Each contract has a defined expiration date and strike price, so potential gains and losses can be calculated in advance. This hedged buying strategy involves holding Bitcoin and selling call options, preferably 15-20% above the current market price.

It would be unfair to call it a fixed income trade as this strategy aims to increase the trader’s Bitcoin balance, but it does not protect against negative price movements for those who measure returns in terms of USD.

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

Bitcoin call options markets on June 4. Source: Deribit

Since Bitcoin was trading at $ 37,000 when the above data was gathered, a trader could sell the $ 44,000 call option for June 4, expiring in six days. Depositing 0.10 BTC margin should be enough to sell 0.30 BTC call options contracts, thus receiving 0.00243 BTC in advance.

Two results: a higher amount of Bitcoin or a larger USD position

There are essentially two outcomes, depending on whether Bitcoin is trading above or below $ 44,000 at 8:00 a.m. UTC on June 4. The call option of $ 44,000 will become worthless for any level below this figure, so the option seller keeps the prepayment of 0.00243 BTC in on top of the 0.10 BTC margin deposit. .

However, if the expiration price is greater than $ 44,000, the trader’s margin will be used to cover the price difference. At $ 46,000, the net loss is 0.011 Bitcoin, reducing the margin to 0.089 ($ 4.094). Meanwhile, at the time of deposit, the 0.10 Bitcoin margin was worth $ 3,700.

This is because the covered call option seller would have made more money by holding 0.10 Bitcoin from the start, as the price went from $ 37,000 to $ 46,000. However, by receiving the prepayment of 0.00243 BTC, we will increase Bitcoin holdings even if the price drops below $ 37,000.

This 2.4% profit in Bitcoin terms will occur for any expiration below $ 44,000, which is 18.9% above the $ 37,000 when the Deribit option prices were analyzed.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should do your own research before making a decision.

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