Case Study: Generating additional return on crypto holdings with covered call options

23 NOV 2023 | VIEWS | 3 MIN READ

In a year where Bitcoin has experienced a remarkable year-to-date surge of more than 100%, many cryptocurrency holders are exploring strategies that allow them to maximize their returns while retaining their assets, with an eye on seizing the upcoming upward potential.

In this case study, we will explore how Wintermute Asia assisted the treasury of a crypto project in selling covered calls.

Earning returns without selling your assets

A treasury with a $10 million portfolio aimed to generate extra returns on their BTC, while maintaining ownership of the BTC. At the end of June 2023, Bitcoin was priced around $30,000, and emerging data indicated the potential for price stability in the near future, setting the stage for the exploration of strategies that could leverage the benefits of this anticipated stability.

How a covered call option can generate additional returns

We provided assistance to the treasury by executing weekly call options, where each week the strike price is established at 7% above the current BTC price at that time. These options were priced at 0.5% of the BTC’s $10M notional value, which allowed for the accumulation of premiums as income.

If the BTC price doesn’t settle above the option’s strike price at the expiration date, the calls are worth 0 and the seller collects the premium.

Wintermute Asia’s wide coverage, no fees and direct access to major Options liquidity sources, and capital-efficient margin framework, enabled a tailored and cost-effective solution to optimize returns while safeguarding the treasury’s substantial BTC holdings.

Below we have an example of the potential Weekly P&L generated with a covered call option. The BTC price at the time is $30,000 and the treasury sells the $32,000 call:

1. Price stable and settles below strike price at the expiry date

For example BTC settles at $31,500, the call option would not be exercised. In this case:

• BTC Value at Initial Price = $30,000 x 333 BTC = $10 million


• BTC Value at Expiry = $31,500 x 333 BTC = $10.5 million


• Option P&L = $50,000 (Premium)


• Total P&L = $10.5 million (Value at Expiry) – $10 million (Value at Initial Price) + $50,000 (Premium) = $550,000

2. Price rises and settles above the strike price

For example BTC settles at $32,500 the call option is exercised and the treasury sells the BTC at the strike price. They are still up in dollar terms compared to the week prior:

• BTC Value at Initial Price = $30,000 x 333 BTC = $10 million


• BTC Value at Expiry = $32,500 x 333 BTC = $10.833 million


• Option P&L = ($32,000 – $32,500) x 333 BTC + $50,000 (Premium) = -$116,500


• Total P&L = $10.833 million (Value at expiry) – $10 million (Value at Initial Price) – $116,500 (Option Value) = $716,500

Results: Treasury sold covered calls, generating an additional 26% APY on their $10M BTC

Scenario 1: the market was stable, bringing consistent income

Over a 12-week period, the BTC prices were relatively stable to the upside, not exceeding a 7% increase in a single week. During this time, the treasury consistently received a weekly option premium of 0.5%, amounting to $50,000. In total they collected $600,000 premium over the 12-week span, equivalent to a 26% APY.

• BTC Value at Initial Price = $31,000 x 333 BTC = $10 million


• Weekly P&L from Option = $50,000


• 12-Weeks P&L from Option = $600,000


• Annualized P&L from Option = $2.6 million (+26%)

Scenario 2: Treasury would still be up in dollar value on the week the call options go in the money

In the hypothetical case that in a given week the BTC price had settled above the strike price the treasury would still be up in dollar value.

Suppose the following scenario: in the beginning of week 7, BTC price was $31,000 and hence the new strike price for the call option was set at $33,000 (in line with strategy of having the strike price approximately 7% higher than the current spot price). By the end of week 7, BTC rallies from $31,000 to $33,500. In this situation, the treasury would sell the call at $33,000 strike price, below is the breakdown of P&L

• BTC Value at Initial Price = $31,000 x 333 BTC = $10 million


• BTC Value at Expiry = $33,500 x 333 BTC = $11.17 million


• 6-Weeks P&L from Options = $300,000


• Week 7 Option P&L = ($33,000 – $33,500) x 333 BTC + $50,000 = -$116,500


• Total P&L 7 Weeks = $11.17 million (Value at expiry) – $10 million (Value at Initial Price) + $300,000 (6-Weeks P&L from Options) – $116,500 (Week 7 Option P&L) = $1.35 million

The treasury can then continue to sell calls the following weeks.

Key Takeaways

The covered call strategy generated the treasury extra returns without selling their BTC. This strategy works well in different market conditions.

• In Scenario 1, when the market was stable or saw small price increases, it brought in consistent income


• In Scenario 2, the treasury would still be up in dollar value on the week the call options go in the money, as they sell at a higher price than compared to the start of the week

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