What is a covered call strategy in crypto options?

Understanding the Covered Call Strategy in Crypto Options

A covered call strategy in crypto options is an income-generating approach used by holders of cryptocurrency who already own a specific digital asset, such as Bitcoin or Ethereum. This strategy involves selling a call option against the crypto asset currently held in the investor’s wallet. By doing so, the investor receives a premium—a fee paid by the buyer of the call option—for granting the buyer the right, but not the obligation, to purchase the underlying crypto at a predetermined price (the strike price) within a set timeframe (the expiration date).

The term “covered” refers to the fact that the seller already owns the underlying asset. This ownership acts as a safety net, eliminating the risk of having to buy the asset at a higher market price if the option is exercised. The primary objective of this strategy is to generate passive income from the premium while holding the asset, particularly in a sideways or mildly bullish market.

How to Execute a Covered Call in Crypto Options

Executing a covered call requires access to a crypto derivatives exchange that supports options trading, such as Deribit, OKX, or Bybit. The process involves several precise steps:

• Ensure you own the underlying cryptocurrency—for example, 1 BTC.
• Navigate to the options trading section of your chosen platform.
• Select the call option you wish to sell. Key decisions include choosing the strike price and expiration date.
• Decide whether to go for an out-of-the-money (OTM) call (strike price above current market price) or an at-the-money (ATM) call (strike price near current price).
• Place a sell order for the call option contract. This action credits your account with the premium immediately.
• Monitor the position until expiration or until you decide to close it early.

For example, if Bitcoin is trading at $60,000 and you sell a call option with a strike price of $65,000 expiring in 30 days, you receive the premium upfront. If Bitcoin remains below $65,000 at expiration, the option expires worthless, and you keep both the premium and your BTC.

Risks and Limitations of the Covered Call Strategy

While the covered call strategy can enhance returns, it is not without risks. The most significant limitation is the capped upside potential. If the price of the underlying cryptocurrency surges well above the strike price, the asset may be called away, meaning you are obligated to sell it at the strike price, missing out on additional gains.

Another risk is market volatility. Cryptocurrencies are known for their rapid price swings. A sudden bullish breakout could trigger early exercise or assignment, especially on American-style options. Additionally, implied volatility affects the premium size; lower volatility leads to smaller premiums, reducing income potential.

Holding the asset during the option period also exposes the investor to downside risk. If the crypto price drops significantly, the loss on the underlying asset may outweigh the premium received. The premium only provides a small buffer and does not fully protect against bear markets.

Choosing the Right Strike Price and Expiration

Selecting the appropriate strike price and expiration date is crucial for optimizing returns while managing risk. Traders often use delta values as a guide—options with a delta of 0.3 or lower are considered out-of-the-money and carry a lower probability of being exercised.

• A higher strike price reduces the likelihood of assignment but offers a smaller premium.
• A lower strike price increases the premium but raises the chance of the asset being called away.
• Shorter expiration periods (e.g., weekly options) allow for more frequent premium collection but require active management.
• Longer expirations provide higher premiums but lock up the asset for more time, increasing opportunity cost.

Technical analysis tools, such as support/resistance levels and moving averages, can help determine realistic price targets. For instance, if Bitcoin has strong resistance at $67,000, placing a call option at $68,000 may be a strategic way to collect premium with low exercise risk.

Accounting for Fees and Platform Mechanics

Crypto options platforms often charge trading fees for opening and closing positions. These fees can eat into the premium income, especially when trading small contracts. It is essential to review the fee structure of the exchange before initiating a trade.

Some platforms use inverse options, where the premium and payouts are settled in the underlying cryptocurrency (e.g., BTC), not in stablecoins or USD. This introduces additional price exposure, as the value of the received premium fluctuates with the market.

Moreover, margin requirements may apply. Although covered calls are not naked options, some exchanges still require collateral or impose margin rules to cover potential obligations. Ensure your wallet has sufficient balance to meet these requirements and avoid liquidation.

Real-World Example of a Covered Call Trade

Imagine you hold 2 ETH, currently valued at $3,000 each. You believe ETH will remain range-bound over the next month. You decide to sell two call options with a strike price of $3,200, expiring in 28 days. Each option pays a premium of 0.05 ETH, totaling 0.1 ETH received upfront.

• If ETH stays below $3,200 at expiration, you keep the 0.1 ETH premium and retain your 2 ETH.
• If ETH rises to $3,500, the options are exercised. You must sell 2 ETH at $3,200 each, receiving $6,400. You miss out on the $300 per ETH gain above the strike, but you still keep the 0.1 ETH ($300) premium.
• If ETH drops to $2,500, you lose $1,000 in value on your holdings, but the $300 premium slightly offsets the loss.

This illustrates how the strategy performs under different market conditions.

Frequently Asked Questions

Can I use a covered call strategy with stablecoins?No, the covered call strategy requires ownership of a volatile underlying asset. Stablecoins do not fluctuate in value, making options on them virtually non-existent and economically unviable due to lack of price movement.

What happens if I don’t have enough crypto to fulfill the option if exercised?Since the strategy is “covered,” you must already own the asset. If you sell a call without holding the crypto, it becomes a naked call, which carries unlimited risk and is not allowed on most regulated crypto options platforms.

Can I close the call option before expiration?Yes. You can buy back the call option at any time to close the position. This is useful if the underlying price rises quickly and you want to avoid assignment or lock in a portion of the premium.

Are covered calls available on all crypto exchanges?No. Only exchanges offering options trading support covered calls. Spot-only platforms like Coinbase or Kraken do not provide this functionality. You must use derivatives-focused platforms such as Deribit, OKX, or Bybit.