Writing and selling Bitcoin (BTC) call options was one of the most popular yield-generating strategies a year or so ago, but the recent market selloff has made cash-and-carry arbitrage less attractive. It's trending again.
Selling a call option is a way to provide the buyer with insurance against bullish price movements in exchange for a compensation called a premium. The premium received is the maximum profit that can be made by the call option seller.
Throughout late 2022 and early 2023, traders continually sold call options on Bitcoin and Ethereum at strikes well above current market rates, generating additional yield on top of their spot market holdings. According to algorithmic trading firm Wintermute, they are currently selling $80,000 BTC call options expiring at the end of May. Bitcoin is currently trading around $58,000.
“One popular strategy among traders is to sell out-of-the-money call options at higher strike prices, such as the $80,000 mark set at the end of May. The strike price is above the current high range and is unlikely to be exercised, allowing traders to collect premium while reducing their risk exposure,” Wintermute said in a note shared with CoinDesk. mentioned in.
If the Bitcoin price ends in May below $80,000, sellers will take home the entire premium they received. But if the price soars past $80,000 and they don't hedge or hold long spots, they could lose money.
The resurgence of short demand for Bitcoin options is evident from the decline in Deribit's Implied Volatility Index (DVOL), which measures expected price volatility over the next 30 days on an options basis.
Implied volatility is influenced by option demand, and as write preference increases, the indicator typically decreases.
According to charting platform TradingView, DVOL fell from an annualized rate of 72% to 59% in 10 days. Ethereum (ETH) DVOL dropped from 80% to 60% last week, but has rebounded to nearly 80% this week.
Singapore-based QCP Capital also noted heavy selling of BTC call options last week.
QCP said in a market note last week: “This is a result of spot prices remaining within a narrow range and basis yields depleted. On our desks, we are seeing many clients return to short option strategies.” Stated.
On Wednesday, Bitcoin broke out of its four-week bond between $60,000 and $70,000 and fell to $56,600 due to several factors, including waning demand for spot ETFs and a recovery in the dollar index.
Cash-and-carry arbitrage involves buying the underlying asset in the spot market while simultaneously selling a futures contract when the latter is trading at a significant premium. This is a strategy that helps traders capture the premium, or price difference, while avoiding the volatility associated with price changes.
However, this strategy is now much less attractive than it was in the first quarter, as futures premiums have fallen sharply in recent weeks.
The annualized three-month premium for Bitcoin futures listed on Binance, OKX, and Deribit has fallen to nearly 5%, down from a high of 28% at the end of March. Premiums for regulated futures listed on the Chicago Mercantile Exchange have seen a similar decline.
In other words, so-called market-neutral bets no longer offer significantly higher returns than safer U.S. Treasury securities. At the time of writing, the 10-year bond yield, the so-called risk-free rate, was 4.61%.
