Selling covered calls, together with credit spreads is one of my favorite income-generating strategies in the stock market in the form of options premium.
A few years ago I decided to test the idea of selling covered calls on cryptocurrencies as well, but things were a bit different like in the stock market. Unlike the stock market where your shares get assigned or called away, crypto options (at least on the Deribit platform) are settled in crypto itself. .
In this article I made some calculations on selling covered calls and credit spreads with Solana stock with different strike prices at expiry
Disclosure: This article contains affiliate links to deribit.com bitcoin options trading website, by clicking on links on this page and by investing with deribit, I will earn affiliate income at no cost to you. Also, I'm not a financial advisor and I don't give you any advice, I'm just sharing my own experience. Investments in stocks, funds, bonds or cryptos are risk investments and you could lose some or all of your money. Do your due diligence before investing in any kind of asset.
Also, you should be very careful with leverage and trade only fully covered calls to avoid unpleasant surprises.
Selling Covered Call Options on Crypto (BTC/ETH/SOL)
At the start of September, I noticed there is a new coin, Solana, available for trading crypto options on Deribit, and I decided to give it a try.
On September 11, 2022, 1 Solana coin trades just under 35. For trading options, the multiplier is 1. So one coin is enough to trade. Even less as there is leverage available. But using leverage would do harm if our strike call would get reached.
I decided to buy 1 Solana coin at 34.80 and sell 1DTE 36 calls, for a little about 0.14$ premium, but as this is crypto settled I buy 1 SOL coin for $34.80 and sell 1 DTE 36 call, for which I get 0.004 coins.
As long as the price is not reaching 36 by the expiry, the options contract expires worthless. I keep the premium and start over.
Unlike with the stocks, if the strike is above 36, I actually need to pay the difference in crypto. Say it ends at $36, I don't pay anything of course, but if it expires at $36.5 I need to pay the difference between the strike price and spot price in crypto ($0.5 exchanged to crypto).
If it rises to 40 I need to pay $4 or 0.1 SOL
So if it expires at 40, and my call was 36, but I bought it at 35
here is the math: 1+0.004-0.1= 0.904.
I had 1 coin, but now I'm left with 0.904 coins, with the new spot price of 40 they cost $36.16
In case Solana goes to 50, I have to pay a $14 difference in the crypto 0.28
here is the math: 1+0.004-0.28= 0.724, if converted back to USD = 36.2
Now, suppose Solana goes to 100, I have to pay $64 difference in the crypto 0.64
here is the math: 1+0.004-0.64= 0.364, if converted back to USD = 36.4
Now, in dollar terms, we are not losing anything here
Selling Credit Spreads with Solana on Deribit
We buy the same 1 coin for $34.80 and sell 1 DTE 36/37 credit spread for SOL 0.003
if it expires at 36.5 I need to pay the difference of $0.5 in crypto (0.0137)
here is the math: 1+0.003-0.0137= 0.9893, if converted back to USD = 36.1
But now let's see what happens if it expires above our second bought call strike at $37
So if it expires at 40, and my call was 36, I need to pay the difference, between 36 and 40, but also I have the protection at 37, which means I'm getting paid
here is the math: 1+0.003-0.1+0.075 = 0.978, if converted back to USD = 39.12
In case Solana goes to 50, I have to pay a $14 difference in the crypto 0.28, but also I receive $13 or 0.26 in crypto
here is the math: 1+0.003-0.28+0.26= 0.983, if converted back to USD = 49.15
Now, suppose Solana goes to 100, I have to pay $64 difference in the crypto 0.64, but also I receive $63 or 0.63 in crypto
here is the math: 1+0.003-0.64+0.63= 0.993, if converted back to USD = 99.3
As you can see both ways seem to be generating profit, but credit spreads give us better results in the total dollar and crypto terms.
Now, let's take some more realistic examples, suppose we want to invest in 100 Solana coins and sell covered calls on them. We could buy 100 coins for $3,458 and sell 100 call options on them with September 30 expiry (18 days), with a strike price of $35 for 0.076 coins ($2.62*100)
Now let's check what happens if Solana trade 35.5, 40, 50 and 100
if Solana expires at 35.5 which is about 0.5 above our strike, we have to pay the difference in the crypto
here is the math: 1+0.076-0.0141= 1.0619, converted back to USD which gives us $37.16 or $3716. We realize $258 on our initial investment or about 7.46% in 18 days
If Solana expires at 40, we have to pay a $5 difference in crypto, which is 0.125
here is the math: (1+0.076-0.125)*100= 95.1, converted back to USD which gives us $47.55 or $3,804 We realize $346 on our initial investment or about 10% in 18 days
If Solana expires at 50, we have to pay a $15 difference in crypto, which is 0.3
here is the math: (1+0.076-0.30)*100= 77.6, converted back to USD which gives us $47.55 or $3,880 We realize $422 on our initial investment or about 12.2% in 18 days
If Solana expires at 100, we have to pay a $65 difference in crypto, which is 0.65
here is the math: (1+0.076-0.65)*100= 42.6, converted back to USD which gives us $47.55 or $4260 We realize $802 on our initial investment or about 23.19% in 18 days
Last, but not least, let's try to model behavior using credit spreads: suppose we buy 100 Solanas at $3,458 and sell both 35 strike price call options and additionally buy 45 long calls paying 0.018
if Solana expires at 35.5 which is about 0.5 above our strike, we have to pay the difference in the crypto
here is the math: 1+0.076-0.018-0.0141= 1.0439, converted back to USD which gives us $37.05 or $3705. We realize $247 on our initial investment or about 7.14% in 18 days
If Solana expires at 40, we have to pay a $5 difference in crypto, which is 0.125
here is the math: (1+0.076-0.018-0.125)*100= 93.3, converted back to USD which gives us $37.36 or $3,736 We realize $278 on our initial investment or about 8.03% in 18 days
If Solana expires at 50, we have to pay a $15 difference in crypto which is 0.3, but we also receive $5, which is 0.1 in crypto
here is the math: (1+0.076-0.018-0.30+0.1)*100= 85.8, converted back to USD which gives us $42.90 or $4,290 We realize $832 on our initial investment or about 24.06% in 18 days
If Solana expires at 100, we have to pay a $65 difference in crypto, which is 0.65, but also we get paid $55 or 0.55
here is the math: (1+0.076-0.018-0.65+0.55)*100= 0.958, converted back to USD which gives us $95.8 or $9,580 We realize $6,122 on our initial investment or about 177% in 18 days
As you can see, selling crypto options on the Deribit trading platform is not so much different than selling them on stocks, except they are settled in crypto.
Are you still puzzled? Consider booking an online consultation: Selling Covered Call Options on Crypto (BTC/ETH/SOL)
