Options Trading Strategies: Covered Call
Covered call is a two legged strategy where the trader owns the underlying security, and sells calls on a regular basis to collect an income. For example, if you own 0.5 BTC you will sell 0.5 call options.
When to use this strategy?
You are neutral to bullish on the market. You can use covered call strategy from various reasons:
- If you want to sell the BTC/ETH at a price higher than you purchased it, selling the Out of The Money calls secures that if the underlying price goes up, you will sell BTC/ETH and take the profit. In this case the options contract has to be exercised.
- If you want to hodl BTC/ETH, covered calls are used as a hedge to your long position, and you generate an income from options premium. In that case you wish for the options to expire worthless.
Below is a Profit and Loss chart example of a covered call options strategy:
Pros:
Covered call is considered a good strategy to generate regular income. The risk is lower than simply hodling the BTC/ETH.
Cons:
Although it is not a very risky strategy, the maximum gain is limited to the premium you have received when you sold the call, but the potential loss is unlimited.
Example:
In this example, BTC is trading at 43,407.00 USD. You have bought a BTC at 43,770.50 USD and sold a call with a strike price of 44,000.00 USD, an expiration date of February 18th 2022 for a premium of 1,345.51USD.
The Profit and Loss chart is given below:
Upon expiration:
If the spot price is above the selected strike price, the contract is exercised, and you make a profit from the difference between the strike price and spot price, plus the premium.
If the spot price makes small changes in any direction, or falls, then the contract expires worthless and you keep the premium.
You are in the profit if the bitcoin price end up above the break-even price at expiration.
| BTC at Expiry (USD) | Payoff (USD) |
|---|---|
| 41,562.00 | -862.99 |
| 41,804.00 | -621.99 |
| 42,063.00 | -361.99 |
| 42,309.00 | -115.99 |
| 42,424.99 (break even) | 0 |
| 42,676.00 | +251.01 |
| 43,102.00 | +677.01 |
| 43,736.00 | +1,311.01 |
| 44,000.00 (strike price) | +1,575.67 (max gain) |