Selling Put Options on Crypto to Generate Income

| Options Trading | 11 seen

Lately, I've been playing around with the idea of selling put options on crypto. A popular income-generating strategy in the stock market. But there are a bit different rules in crypto, with the biggest difference being - crypto options are settled in crypto itself, meaning there is no actual crypto delivery, no assignments, or whatsoever, once your strike price is touched, you pay the difference in crypto itself.

Say you sold Bitcoin Put with a strike price of $30,000 and BTC dipped to $25,000 you won't get assigned 1 Bitcoin at $30,000, instead, you will pay the difference of $5,000 converted back to Bitcoin (5000/30000), or you will lose from this trade 0.166BTC. Ouch, that hurts I know. I have been there, seen that many times, been frustrated, and even called it a scam... but then I started to explore how to hedge with futures or crypto itself.

And I come u with an idea - I will sell put options, but in case of an assignment (expiry in the money) on the expiry I will buy crypto futures at the market price and turn this trade into a covered call trade. In

case with Bitcoin falling to $25,000 I will buy Bitcoin futures at 25,000 and will sell call positions against the position, thus lowering my break-even price and eventually recovering from this trade.

To test this idea in life I decided to start small and started selling 1 DTE Ethereum put options on the ByBit platform

Here is the trade setup:

On July 20, 2023, I sold a 0.1 Put option on ETH with a strike price of 1,875 and expiry on July 21, 2023. For this trade setup, I was rewarded with $0.42 (after fees)

Open Date Symbol Exp Date Call or Put B/S DTE Stock Price Break Even Price Strike Price Premium C Fees Exit Price Close Date Profit/Loss
07/20/2023 ETH 07/21/2023 put s 0 $1,893.00 $1,870.20 $1,875.00 4.8 0.1 0.0566604     $0.42

I decided to reinvest this premium in ETH perpetual futures and bought 0.01 ETH futures (as I'm buying with 50x leverage, it cost me just $0.38)

What happens next?

On the expiry date (July 21) ETH is trading above 1,875, in such case my put option expires worthless and I keep the premium and start over.

in case ETH closes under 1,875, say 1,850, I would need to pay the difference in crypto itself for this put option, I would lose from the option, but at this moment I would go long and actually buy 0.1 ETH at the spot price (1,850), to start selling covered calls on this position.

Break-even: $1,874.58

As on July 21 this put option expired worthless, I sold another 1 DTE expiry option with an 1875 strike price, thus lowering my break-even price:

Open Date Symbol Exp Date Call or Put B/S DTE Stock Price Break Even Price Strike Price Premium C Fees Exit Price Close Date Profit/Loss
07/20/2023 ETH 07/21/2023 put s 0 $1,893.00 $1,870.20 $1,875.00 4.8 0.1 0.0566604     $0.42
07/21/2023 ETH 07/22/2023 put s 1 $1,889.00 $1,869.90 $1,875.00 5.1 0.1 0.0567705     $0.45

Also today I bought additional 0.01 ETH futures.

Now, after 2 days of selling put options on a 0.1 ETH contract, I have earned in premium already 0.88 USDC

My new break-even price: is $1,874.12

Also, I'm holding 0.02 ETH futures with an average buy price of  $1,889.83

Once I will have at least 0.1 ETH futures I will switch to selling call options on this position.

I hope to grow this "portfolio" to 1 ETH and sell call options on it by the end of October 2023