Bitcoin
Research Firm Favors Bitcoin (BTC) ‘Covered Strangle’ Strategy to Boost Portfolio Yield
Bitcoin (BTC) Investors looking to generate extra income beyond their spot market holdings should consider setting up a “covered strangle” options strategy, says research firm 10X, which has a impeccable record of predicting market trends, 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 strikes in options jargon) above the market rate of the underlying asset and selling an OTM put option with strike prices below the spot market price of the underlying.
The premium received for selling/shorting the call option, or for protecting the counterparty against price rises, and for selling the put option or insurance against downtrends, represents the extra income.
10x suggests selling a $100,000 strike option, which is 50% above BTC’s current market price, and a $50,000 strike option, both expiring in December 2024, while holding the cryptocurrency in spot market.
“Our favorite strategy is to buy bitcoin spot, sell 100,000 strikes, and sell 50,000 strikes for expiration in December 2024. Selling the call can yield 11%, and selling the put can yield 6 %,” Markus Thielen, founder of 10x Research, said in Monday’s client note, detailing the suggestion.
“So this strategy gives us a 17% downside buffer or 17% more yield depending on where BTC closes in December, plus we capture all of the upside (or downside) of bitcoin,” Thielen added.
The strategy is preferred when the market outlook is optimistic, but the upward trend is expected to develop slowly, keeping implied volatility or investors’ expectations of price turbulence low. Under these conditions, options, especially OTM calls and puts, lose value more quickly as expiration approaches, making money for sellers.
The strategy, although appealing, 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 shares and short options incur losses and, as a result, the percentage losses are double what they would be for a covered call position [buy spot = sell OTM call] alone,” said Fidelity in a ‘disguised chokehold’ explainer.
In other words, the 10x strategy is for those who believe that the bitcoin bull market will progress slowly and that corrections, if any, will not cause prices to fall below $50,000. At the time of writing, bitcoin changed hands at $67,170, representing a 58% year-to-date gain, CoinDesk data shows.
Several analysts, including Thielen and Arthur Hayes, former CEO of cryptocurrency exchange BitMEX, expect a slow grind higher.