Wheel Strategy on Bitcoin

Bitcoin, with its high volatility and potential for significant returns, has drawn attention from investors looking to maximize their profits. One strategy worth exploring is the Wheel Strategy, a versatile options trading method that can generate consistent income. However, the strategy's effectiveness, particularly with Bitcoin's inherent volatility, requires careful consideration and adaptation.

The Wheel Strategy involves a systematic approach to trading options that can be broken down into three main steps:

  1. Sell Cash-Secured Puts: The process begins by selling cash-secured put options on Bitcoin. By selling a put option, you agree to purchase Bitcoin at a predetermined price (strike price) if the option is exercised. In return, you receive a premium, which can be viewed as an income stream.
  2. Buying Bitcoin (if Assigned): If the price of Bitcoin falls below the strike price, you may be assigned and obligated to purchase Bitcoin at that price.
  3. Sell Covered Calls: Once you own Bitcoin, you can sell covered call options. This means selling call options on the Bitcoin you own, obligating you to sell it at the strike price if the option is exercised. This step also generates premium income.

If the Bitcoin price rises and the call options are exercised, you sell the Bitcoin at the strike price and potentially restart the cycle by selling cash-secured puts again.

Bitcoin's volatility is a double-edged sword. While it can lead to substantial profits, it also introduces significant risk. The rapid price swings can lead to unexpected assignments or substantial losses if the market moves unfavorably.

At Terramatris, our core strategy revolves around selling put options. This idea of this article emerged after some of our Bitcoin put options got challenged. Instead of accepting assignment, I decided to roll forward the options for a credit while decreasing the total contract size, effectively managing risk.

Selling put options aligns with the initial step of the Wheel Strategy. However, instead of aiming to get assigned and holding Bitcoin, we often look to roll out challenged options positions. Rolling out involves closing the current position and opening a new one with a later expiration date or a different strike price. This can help mitigate potential losses and provides additional flexibility to adapt to market conditions.

Dollar-cost averaging is a strategy where you invest a fixed amount of money into Bitcoin at regular intervals, regardless of its price. This approach reduces the impact of volatility by spreading out the investment over time, thereby averaging the purchase cost. We invest mostly only the option premium we recieve from selling put options.

In most cases, we aim to avoid getting assigned too much Bitcoin, especially when using leverage. The risks associated with holding large amounts of Bitcoin in a volatile market can be detrimental to a portfolio, particularly if the price moves significantly against your position. By rolling out options and sticking to a disciplined DCA approach, we manage our exposure more effectively.

While the Wheel Strategy can be a profitable method for generating income with Bitcoin, it requires careful management of the inherent risks. For those who are less comfortable with the possibility of significant assignment, focusing on selling put options and rolling out positions can provide a more controlled approach. Additionally, dollar-cost averaging can help mitigate the effects of Bitcoin's volatility, offering a balanced and strategic method for long-term investment.

At Terramatris, we emphasize the importance of risk management and adaptability. By selling put options and employing a disciplined DCA approach, we navigate the complexities of Bitcoin investing with a clear, strategic focus. Continuous learning and adaptation are essential in managing the dynamic nature of the crypto market, ensuring that our investments align with our risk tolerance and market outlook.