What are covered calls in crypto and how to use them?

• Covered calls in crypto are a strategy that involves owning an underlying asset and selling a call option against it.

• This strategy may result in compensation in the form of option premiums and provide some protection against market volatility.

• However, it also caps the potential upside and requires meticulous strategy and risk control.

What are covered calls?

Covered calls are a financial strategy that involves two parts: owning an underlying asset and selling a call option against that asset. In the context of cryptocurrencies, this means owning a specific coin or token and simultaneously selling a call option on it.

This strategy may result in compensation in the form of option premiums, providing a form of downside insurance while holding onto the underlying asset.

How do covered calls work in crypto?

To execute a covered call strategy in crypto, an investor needs to own a certain amount of a cryptocurrency and then write (sell) call options on that same asset. This process may result in compensation from the option premiums.

However, it's important to note that this strategy caps the potential upside. If the price of the cryptocurrency rises above the option's strike price, the investor will miss out on those gains. On the other hand, if the price falls, the compensation from the option premiums can help offset some of the losses.

When should you use covered calls in crypto?

Covered calls are often used when an investor has a neutral view on the market. That is, they expect the price of the underlying cryptocurrency to remain relatively stable over the short term.

This strategy can be particularly useful for long-term holders of a cryptocurrency, who can receive compensation from the option premiums while they wait for the price of the cryptocurrency to appreciate.

What are the risks of using covered calls in crypto?

While covered calls can provide compensation and some protection against market volatility, they also come with risks.

One of the main risks is that the strategy caps the potential upside. If the price of the cryptocurrency rises significantly, the investor will miss out on those gains. The investor is also obligated to deliver the underlying cryptocurrency if the buyer of the call option decides to exercise it. This could potentially lead to losses if the investor has to acquire the cryptocurrency at a higher price in the market to fulfill the obligation.

How can you manage the risks of covered calls in crypto?

Managing the risks of covered calls in crypto requires meticulous strategy and risk control.

It's important to carefully select the strike price and expiration date of the call option to align with your market expectations. Monitoring market conditions and adjusting the strategy as needed is crucial. For example, if the market becomes more volatile, you might choose to sell call options with a higher strike price to allow for more upside potential.