How to Sell Covered Calls on Crypto (Ethereum) on Bybit with Futures

  • Covered calls on crypto can be easily executed by buying actual crypto and selling call options on trading platforms like Deribit or Bybit.
  • Settlement of crypto options occurs in crypto itself, without the delivery of shares or crypto.
  • Trading covered calls with crypto can be a profitable strategy when combined with technical analysis and proper risk management, but it's important to be cautious with leverage and not overtrade.

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Selling covered calls on crypto might sound like a daunting task, but actually is quite easily doable. Unlike in the stock market, where actual shares are delivered when trading put or call options, in crypto things work a bit differently.

The main difference between stock and crypto options - in crypto, options are settled in crypto itself, meaning there is no actual delivery of shares or crypto, just settlement.

One way to trade covered calls with crypto would be to buy actual crypto on the market and then sell a call option on the trading platform (like Deribit or Bybit)

This is not trading advice. Investments in stocks, funds, bonds, or cryptos are risk investments and you could lose some or all of your money. Do your due diligence before investing in any kind of asset

This article contains my referral URL to ByBit, if you will decided to click on the link, and open an account with ByBit, I will earn a small commission at no cost to you

Price of Ethereum May 19, 2023

Say you buy 1 ETH at $1,800 and simultaneously sell a call option with a strike price of $2,000, for that receiving premium. Now you wait for the expiry and depending on where the market goes. - you either start over or close your position. I have been trading crypto options in such a manner for years and as long as you don't overtrade and stick to technicals, this can be quite a profitable strategy, especially if paired with dollar cost averaging buying additional bits of crypto on regular intervals.

For most of the time I've been trading crypto options on the Deribit platform and this is the platform I would actually recommend because of its simlicicty and trustworthiness. Thus in this article I will share my discoveries on trading with bybit trading platform.

Another way to set up a covered call on crypto could be by buying a perpetual futures contract and selling covered calls on it. One of the greatest advantages of perpetual crypto contracts is leverage. on bybit you could get leverage of up to 125x. What's also great about Bybit - you can have a 0.1 minimum order for ETH and a 0.01 minimum order size for BTC. Something great if you don't have a lot of capital to put in trades. 

The minimum order size on the Deribit platform for example is 1 ETH and 0.1 BTC 

without further ado:

On May 18, 2023, I decided to test my idea on buying long perpetual ETH futures and simultaneously selling a call option on it

Here is the trade setup:

  • BOT 0.1 ETH-PERPETUAL 1809.41 USD
  • SLD 0.1 ETH MAY 19 '23 1825 Call Option 5.1 USD

For this trade setup, I was required just 1/50 in margin collateral, about 0.002 ETH / 3.62 USD + 23 USDC margin for the 0.1 call option.

Total investment: 26.62 USD

What happened next?

On the expiry date, May 19, 2023, ETH was trading under $1,825 per coin -  options expired worthless and I kept the premium and sold another call option on the same perpetual future contract

  • SLD 0.1 ETH MAY 20 '23 1850 Call Option 7.2 USD

As Ethereum expired under my strike price of $1,825 I rolled up my strike price to $1,850 for the next day's trade. In just two days I have collected already $1.23 in premium. 

Ethereum trading journal

What can happen next?

On the expiry date, May 20, 2023, ETH is trading under $1,850 per coin -  options expire worthless and I keep premium - if ETH trades above $1,850 I must pay the difference between spot and strike price.

if ETH trades above $1,850 I must pay the difference between spot and strike price.

Say ETH expires at $1,900. I would need to pay a difference of $50 in crypto itself (50/1850*0.1) or about 0.0027 ETH / 5.1 USD

But as I additionally have a perpetual future established at $1,809 I will gain from the future $91*0.1 or converted to crypto 0.005 ETH / 9.5 USD

Of course, I should manually close the futures position at the time of expiry.

In case this call position will get assigned at $1,900 I will earn

0.51+0.72-5.1+9.5 =5.63 USD

That’s quite an impressive potential return on investment of 21.14% in just two days

Now, the biggest drawback from such trading, as always with covered calls itself is a significant price drop, which might be even more painful when trading on margin with leverage.

Just for the illustration let’s model what happens if Ethereum drops to $1,500 (such a scenario is quite possible).

IF ETH expires at $1,500. I would keep the premium of 1.23 USD

But I would feel the pain on the perpetual future established at $1,809.41 where I would lose from the future $309.41*0.1

In case this call position will expire at $1,500 I will lose

1.23-30.94=-29.71 USD

Of course, that is just a paper loss, and as long I will keep the future positions open I can still trade calls against it, but it will be much harder to find decent strike prices + additionally I will feel the pressure on margin, or I will need to deposit additional USDC to keep this position afloat.

Future trading on leverage can be very dangerous - be careful with overtrading or oversuing leverage. Always leave something for the cushion, in the case with crypto I would recommend don't use more than 50% ov leverage at any time. 

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