Assume an investor holds a certain amount of BTC. Though not optimistic about the short-term market, he doesn’t want to sell the BTC. In this scenario, selling a covered call on the position might be an attractive strategy.
Selling covered calls is a strategy to reduce position holding cost by selling call options. The options seller will receive premium paid by the buyer and is required to freeze BTC as performance margin to fulfill his obligation when the buyer exercises the options.
Investment portfolio of selling covered calls: Holding a long position of BTC + Selling same-size BTC call options
An example on selling covered calls:
Assume a miner has 10 BTC. He sells 10,000 conts of BTC options with strike price 11500 USDT that expires on Sept.25 (the face value of each contract is 0.001 BTC; 10,000 conts corresponding to 10 BTC). According to the current options price which is 500 USDT, the premium he can receive is 5000 USDT.
Selling quantity of call options (cont) = 10 BTC/0.001 BTC (the face value of each contract) = 10,000 conts
The premium received = options price * selling quantity * face value
If the BTC/USDT index price rises to 12000 USDT on the expiration date (Sept.25), which is higher than the strike price 11500 USDT, the options buyer exercises the options and receives the delivery profit from the seller, which is 0.41667 BTC and will be deducted from seller’s performance margin. For the seller, the remaining performance margin 9.58333BTC (10BTC-0.41667BTC) will be released to his account after the delivery.
Delivery profit the call options seller has to pay = - (delivery price – strike price) * position quantity * contract face value / delivery price
= - (12000-11500) *10000*0.001/12000
≈ - 0.41667BTC
The miner has to transfer 0.41667 BTC to the buyer due to the rising market, and the realizable value of the remaining 9.58333BTC is 9.58333*12000≈115000USDT (equivalent to the seller sells 10 BTC at the price 11500 USDT)
Therefore, this scenario is equivalent to the miner sells BTC at the price of 11500 USDT (in fact, he still holds the remaining BTC released from the frozen margin) and obtains the 5000 USDT premium income.
Assume on the expiration date the BTC/USDT index price is 11200 USDT, which is less than the strike price 11500, at this time the call options become invalid out-of-the-money options. The total 10 BTC will be released to the miner’s account and he can also receive 5000 USDT premium income.
Note: The above example is for reference only and does not constitute a gains commitment. Since Options is a derivative product with high risk, investors are advised to trade prudently.
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