We recently welcomed the news that our friends at Standard Chartered have started offering access to digital assets like Bitcoin to their Institutional Clients. This move brings them one step closer to being able to offer products like those already offered by Anadara. Its only a matter of time in our opinion, until digital asset trading and structured investments become mainstream.
In partnership with Monochrome, Anadara is pleased to introduce a widely accepted equities options strategy to the crypto world, the covered call. This unique proposition for our offering is that the strategy can be employed in a completely digital asset environment, meaning that investors can receive their premium at either BTC, USDT, or USD (fiat).
This post explores the application of a covered call strategy using Bitcoin as the underlying asset. Traditionally employed in equity markets, covered calls allow investors to generate income by selling call options against a long position.
In the volatile and fast-growing crypto market, applying this strategy to Bitcoin offers a unique opportunity to either increase BTC holdings or generate income, which can be delivered in fiat currency, or USDt. Anadara and Monochrome have partnered to offer a range of digital asset structured investments and We assess the mechanics, risks, and rewards of this approach, and provide case examples demonstrating its efficacy in various market conditions.
Boost your Bitcoin Holdings
As the cryptocurrency market matures, investors seek strategies not just for price speculation, but for generating income and managing risk. One of the first options strategies learned by investors in traditional finance, is the Covered Call. When applied to Bitcoin (BTC), this strategy involves holding BTC and selling call options against that position. If executed properly, it can provide a steady stream of income in the form of premiums, helping investors accumulate more BTC, or earn income. A covered call involves two components:
- Owning the Underlying Asset (in this case, Bitcoin).
- Selling a Call Option over that asset, granting the buyer the right (but not the obligation) to purchase BTC from the seller at a predetermined price (the Strike) at expiration (Anadara uses European style options that can only be exercised at Expiry of the Option.
The seller of the Call Option receives a Premium upfront, which can be paid in either in BTC or cash. If BTC remains below the Strike at Expiry, the seller keeps both their BTC and the Premium. If BTC exceeds the Strike on the Expiry Date of the Call Option, the BTC is sold at the Strike, potentially capping gains, but still realising a profit plus the Premium.
For the Bitcoin Maximalists, there is the option to buy the Call Option back, but they will pay a premium over that received when selling the Call Option.
Objectives of a Covered Call Strategy
A widely adopted options strategy in equities markets, and generally one of the first options strategies used by investors, the objective of a covered call strategy can vary depending on the investors long portfolio position. A covered call strategy can be tailored to:
- Generate Income in the form of BTC or fiat.
- Accumulate BTC by choosing to receive Premiums as BTC.
- Reduce Cost Basis of existing BTC holdings.
There are several factors to consider, depending on your objective. The following factors contribute to how you can achieve your objective:
- Strike Selection: The further out-of-the-money the Strike, the less Premium received, but the greater the likelihood of retaining BTC.
- Expiration Frequency: Weekly, monthly, quarterly and annual expirations allow flexibility and consistent income generation.
- Volatility Advantage: Bitcoin’s high implied volatility often results in higher option Premiums compared to traditional equities.
Its important to consider the risk vs reward trade off with this strategy. A Bitcoin Maxi is likely to have a very different objective to a Bitcoin investor who’s sole objective is profit.
Benefits:
- Earn premium income regardless of market direction.
- Smooth out returns during sideways or slightly bullish markets.
- Lower downside breakeven due to the Premium received.
Risks:
- Upside is capped—BTC might skyrocket, and you only capture gains up to the Strike.
- Downside protection is limited to the premium received; BTC losses can exceed that if prices drop significantly.
- Tax complexity and regulatory risks in certain jurisdictions.
Assume an investor holds 1 BTC currently valued at $120,000. They sell a 1-month Call Option with a $130,000 Strike and receive a $2,500 Premium:
- If BTC < $130,000 at expiration: Option expires worthless, investor retains 1 BTC + keeps $2,500.
- If BTC > $130,000: Investor’s BTC is sold at $130,000, realizing $10,000 profit + $2,500 premium.
Based on the above example, annualized, these monthly Premiums (if similar) could amount to over 25% per annum in additional BTC or income, depending on volatility and Strike selection.
Final Thoughts
A Bitcoin covered call strategy provides a powerful way for investors to enhance returns and manage risk in their digital asset portfolios. While not without drawbacks, particularly the capping of upside potential, Covered Call strategies align well with sideways or mildly bullish markets. This approach blends traditional options strategies with modern digital assets, offering a compelling tool for the sophisticated crypto investor.
There are currently very few options available to digital asset investors to employ these strategies. There are a few Bitcoin Covered Call funds being promoted, but these are using traditional finance exchange traded options over Bitcoin ETFs.
Anadara is one of the very few investment banks globally that offers a completely digital offering, without the need for investors to convert to fiat at any stage of the process.
Regardless of your objective, and whether your a Bitcoin Maxi or traditional style investor, get in touch with Anadara or Monochrome for up to date premium pricing for as Bitcoin Covered Call strategy.
