Markets
One research firm favors Bitcoin (BTC)’s “Covered Strangle” strategy to boost portfolio returns
Bitcoin (BTC) Investors looking to generate extra income on top of their spot market holdings should consider setting up a “covered strangle” options strategy, research firm 10X, which has a flawless recording to predict market trends, he said Monday.
The “covered strangle” strategy involves holding the underlying asset in the spot market and simultaneously selling an out-of-the-money (OTM) call option at levels (known as a strike in options jargon) above the current market rate of the underlying asset and selling an OTM put with strikes lower than the spot market price of the underlying.
The premium received for selling/shorting the call option, or protecting the counterparty from price rises, and selling the put or insuring against downtrends, represents the excess return.
10x suggests selling a $100,000 strike call, which is 50% above BTC’s current market price, and a $50,000 strike put, both expiring in December 2024, keeping the cryptocurrency in the spot market.
“Our preferred strategy is to buy Bitcoin Spot, sell 100,000 strike calls and sell 50,000 strike puts expiring in December 2024. Selling the call could yield 11% and selling the put could yield 6%” Markus Thielen, founder of 10x The research, reads Monday’s client note, details the tip.
“Therefore, this strategy provides us with a 17% downside margin or a 17% higher return, depending on BTC’s close in December, plus we could capture all of Bitcoin’s upside (or downside),” Thielen added.
The strategy is preferred when the market outlook is bullish, but the uptrend is expected to develop slowly, keeping implied volatility, or investors’ expectations of price turbulence, low. Under such conditions, options, especially OTM call and put options, lose value faster as expiration approaches, making money for sellers.
The strategy, while attractive, is now risk-free and requires a high risk tolerance. This is because the risk is leveraged below the level at which the put option is sold, in this case $50,000.
“Below the lowest strike price, both long stocks and short puts suffer losses and, as a result, percentage losses are double what they would be for a covered call position [buy spot = sell OTM call] alone,” said Fidelity in a ‘covered choke’ explainer.
In other words, the 10x strategy is for those who believe that the bitcoin bull market will progress slowly and that any corrections will not see prices fall below $50,000. As of this writing, bitcoin changed hands at $67,170, which represents a 58% year-to-date gain, Show CoinDesk data.
Several analysts are expected, including Thielen and Arthur Hayes, former CEO of the cryptocurrency exchange BitMEX a slow grind higher.