Selling Covered Calls on Crypto (Ethereum / Bitcoin) with Deribit?

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Selling covered calls are one of my favorite income-generating strategies in the stock market.

For a time being, I've been selling options on crypto mostly speculative puts and calls betting on where the price won't go, but today I decided to explore what are my chances of selling covered calls on bitcoin or Ethereum on the Deribit platform.

Update: This article has been originally written back in May 2020, some things may have changed ever since. 

In a normal world, covered call selling is a low-risk strategy, but when things cover crypto-covered calls might mean you are actually losing money.

As there is more unknown than known, at least for me,  (when talking about covered calls on the Deribit platform) I decided to risk 1 ETH to learn the truth.

The idea was quite simple, for test purposes I sold 1 Ethereum in the open market (Coinbase), transferred it to Deribit, and simultaneously sold 1 call option on it with short expiry

  • BUY 1 ETH  200.14 USD
  • SELL ETH-8MAY20-210-C x 1 @ETH 0.0145

What happens next?
In a stock market would be just a regular covered call, meaning: I spent 200 USD to buy 1 ETH and simultaneously sold a covered call, agreeing to sell my ETH for 210 in 4 days, and for that, I got a premium of 0.0145 ETH or 2.90 USD (by today's market price), in case ETH is trading above 210 I would realize:

  • value gain + 10USD
  • premium: 2.9USD

Total: 12.9 USD in 4 days or 6.45% potential income return

But as ETH is not traded on the stock market, and as we are talking cash-settled options in cryptocurrency I left still confused

I decided to send a message to the support desk:

Hi there at the support desk!
I believe you receive a high amount of e-mails every day, so I will try to be as short as possible:
How does the Covered Call strategy work in cash-settled options, when they are settled in BTC/ETH?
Say I go to the open market Buy 1 ETH paying 200 USD
I then write a covered call agreeing to sell at 210 and get for that a premium of 0.0145
If on the expiry price climbs to $220, how is the difference calculated?
In normal covered call world (noncash delivery) this would mean I bought at 200, sold a call 210, get a premium, and my shares get called away, I realize both value gain and income from premium.
Hoe this works on Deribit trading platform?
Thanks for looking into this

After sending this message it already started to be clear, that most probably covered calls with cash-settled options don't sound an option

soon I got a detailed reply, which confirmed my concerns:

The most easiest solution to answer your question is to use our position builder:

There you can build up any position and see the potential results.

For example expiry 6th of May, I'll just look at the option:

Positon builder on Deribit

If that expires at $220 You would lose 0.0307 ETH (0.0307 ETH at $220 = $6.754)

Now we combine a long position size 1 ETH from price $200 and the same option:

Deribit Position builder

Your profit when closing both at a price level of $200 would be 0.06 ETH.

I sent one more reply:

Thanks for the reply and thanks for the link to Position Builder tool, I 've been trading for about a year on deribit but didn't know of such.
Yes, I understand, well in a stock market If I go and buy a stock say 200 apiece (there will be a multiplier 100) and sell 1 covered call at strike 210 and the stock rises to 220 I must sell at 210 - I keep the premium ~ say 5 dollars per share + realize gain 10 dollars in total 15 dollars times 100 = $1,500 on a $20.000 investment.
In the stock market, this is physically settled - shares get called away. It seems that in the case with cash-settled (ETH) this is not the way to go. Good to know

And got another reply

Hi Reinis,

What you say is correct. I had cash settled options in mind. The most important thing to realise with these cryptocurrency options is that they are settled in the cryptocurrency itself.

The position builder was launched not to long ago but it is certainly a nice addition and valuable tool.

It seems that popular income-generating strategy selling covered calls won't work on cash-settled cryptocurrency as long as the cash settlement is in crypto currency.

For stock traders, the best option probably would be a bitcoin ETF, but there still is none available.

Still puzzled? Condider booking an online consultation: Selling Covered Call Options on Crypto (BTC/ETH/SOL)