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

The explosive growth of cryptocurrency traders and the lucrative opportunities for profit have attracted the market. However, not every investor is looking for volatility or using degraded levels of leverage to gamble on derivatives exchanges.

In fact, in most decentralized finance (DeFi) applications that focus on revenue, stablecoins usually account for half of the total locked value (TVL).

Although the median cost of the Ethereum network exceeded $10 in May, there is a reason why DeFi is booming. Since traditional finance rarely provides a yield higher than 5%, institutional investors are eager to obtain fixed income returns. However, using Bitcoin can earn up to 4% monthly income (Bitcoin) Derivative products for low-risk transactions.

Non-investment grade bond yield.Source: Federal Reserve

Please note that even non-investment grade bonds with much higher risk than Treasury bills have yields below 5%. At the same time, the official US inflation rate in the past 12 months was 4.2%.

Paul Cappelli, Portfolio Manager, Galaxy Fund Management, Recently told Cointelegraph that Bitcoin’s “inelastic supply curve and deflationary issuance schedule” make it “a powerful hedge against inflation and poor monetary policy, which may cause cash positions to depreciate over time.”

Centralized services such as, BlockFi, and Nexo typically generate 5% to 10% of stablecoin deposits each year. In order to increase spending, people need to seek higher risks, which does not necessarily mean lesser-known exchanges or intermediaries.

Stable coins generate revenue through centralized services. Source:

However, using Bitcoin derivatives can achieve a weekly rate of return of 2%. For these instruments, liquidity is currently located on centralized exchanges. Therefore, traders need to consider counterparty risks when analyzing such transactions.

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

The buyer of a call option can obtain Bitcoin at a fixed price on a set future date. In order to obtain this privilege, one needs to make an advance payment for the call option seller. Buyers usually use this tool as insurance, while sellers usually target semi-fixed income transactions.

Each contract has a set expiration date and strike price, so the potential profit and loss can be calculated in advance. This guaranteed call option strategy includes holding Bitcoin and selling call options, preferably 15% to 20% higher than the current market price.

It is unfair to call it a fixed-income transaction because the strategy is designed to increase the trader’s Bitcoin balance, but it does not prevent negative price fluctuations in terms of return in USD.

For holders, this strategy will not increase the risk, because even if the price drops, the Bitcoin position will remain the same.

Bitcoin call options market on June 4. Source: Deribit

Considering that the transaction price of Bitcoin was $37,000 at the time the above data was collected, traders can sell call options for $44,000 on June 4, 6 days. Depositing 0.10 BTC margin should be enough to sell the 0.30 BTC call option contract, thereby receiving 0.00243 BTC in advance.

Two results: a higher number of bitcoins or a larger dollar position

There are actually two results, depending on whether Bitcoin was above 44,000 USD or below 44,000 USD at 8:00 AM on June 4th. At any level below that number, the $44,000 call option will become worthless, so the option seller will keep the advance payment of 0.00243 BTC in addition to the 0.10 BTC margin deposit.

However, if the expiration price is higher than $44,000, the trader’s margin will be used to make up the difference. At $46,000, the net loss is 0.011 Bitcoin, so the margin is reduced to 0.089 ($4.094). At the same time, at the time of deposit, the margin of 0.10 Bitcoin is worth $3,700.

Indeed, when the price increases from $37,000 to $46,000, the secured call option seller will make more money holding 0.10 bitcoin from the beginning. Nevertheless, by receiving 0.00243 BTC advance payment, even if the price drops below $37,000, it will increase Bitcoin holdings.

The 2.4% profit calculated in Bitcoin will occur on any expiry date below $44,000, which is 18.9% higher than the $37,000 analyzed for the Deribit option price.

The views and opinions expressed here are only Author Does not necessarily reflect the views of Cointelegraph. Every investment and trading action involves risks. When making a decision, you should conduct your own research.