What’s The #1 Best Strategy For Selling Crypto Call Options? The Surprising Results

Selling crypto call options as a campaign is a very popular and often powerful strategy employed by traders, typically for the purposes of consistent income generation.

These campaigns are often done as a covered call or leveraged covered call strategy, but for traders highly experienced in aggressive risk management, can also be conducted as a naked short call campaign.

But what is the best strategy for selling call options on cryptocurrencies like BTC and ETH when considering delta and timeframes?

In this article, we’ll explore the pluses and minuses of short call campaigns, delve into the common strategy variations, plus compare and display actual market performance data over the past year using a wide variety of campaign parameters for both BTC and ETH.

By looking at the performance data and gaining a deeper understanding of the strategy, traders can navigate the potential benefits and risks associated with short call option campaigns more effectively.

Understanding Crypto Call Option Selling Campaigns

To properly utilize a short call option campaign, it is crucial to comprehend the core concept behind the strategy. Unsurprisingly, a short call option campaign involves selling call options, which involve the buyer of the call option having the right to buy the underlying asset at a specific price (strike price) within a given timeframe.

For the seller of the call option, the sale represents a potential obligation to sell the underlying asset at the strike price within the given timeframe.

A trader that sells a call option is usually anticipating that the price of the underlying asset will remain below the strike price during the life of the option, allowing the option to expire worthless, or for the option to lose value, then buy it back at a lower price than it was sold at.

A short call benefits from a decline in prices and/or decreasing volatility.

Not all options carry the rights and obligations detailed above, some options such as index options and most cryptocurrency options use a simple process of cash settlement. Meaning that at expiration, the option is settled in cash where the net value to the involved parties is calculated and settled accordingly.

For cryptocurrency options, this can mean that the settlement occurs in the underlying asset i.e., BTC or ETH. For new traders, it’s worth noting that an option contract can be closed by buying it back (in the case where it was sold, or selling it, in the case where it was initially bought) prior to the options expiry date.

Generally speaking, most professional traders do not hold options until expiry.

Pluses of Crypto Call Option Selling Campaigns

1. Income Generation: The primary goal and advantage of short call option campaigns is the potential to generate income by collecting the option’s premium. Traders receive a premium when selling an option, which provides an immediate source of income.
   If the price of the underlying asset remains below the contract price (strike price), the option loses its value, and at its expiry date will be worthless. In this case, the option seller would keep 100% of the premium collected.As mentioned above, the option seller need not wait until expiry, the option could be bought back at any time prior to expiry.
2. Time Decay: Time decay, also known as theta decay, works in favour of option sellers. As options near their expiry date, any time value they have erodes, leading to a decrease in their price (premium). Option sellers can profit from this time decay by buying back the options at a lower price than the original premium received.
3. Flexibility: Selling call options on your crypto offer flexibility in terms of making trade adjustments when required. If the price of the underlying asset moves unfavourably for the option seller, there are a myriad of tactics such as rolling the trade forward in time (out) and/or adjusting the strike price up or down to buy more time for the trade to be “right”.
   This adaptability enhances the short option sellers' ability to respond to changing market conditions.

Minuses of Crypto Call Option Selling Campaigns

1. Limited Potential Profit: Short options have limited potential profit since the trader’s maximum gain is capped at the premium received from selling the option. If the short call option has been sold naked, and the price of the underlying asset rises significantly above the strike price, the trader’s potential losses can be substantial.
   While there are most certainly times when we are comfortable selling naked call options, it is NOT something we recommend for new traders or those who are not able to respond immediately to price changes in the underlying asset.
   Instead, we encourage traders to sell call options as part of a strategy such as a covered call, a synthetic covered call, a spread, etc as detailed below.
2. Unlimited Risk with Naked Short Calls: Unlike buying call options, which have risk limited to the amount paid for them, selling call options (naked) exposes traders to theoretically unlimited risk.In this case, proper risk management techniques, such as implementing stop loss orders, hedging with futures, or employing other protective strategies, are vital.
   Again for new traders, I cannot stress enough the importance of ensuring that a short call campaign not be done naked.
3. Margin Requirements: When selling options, the margin requirements for the account will be higher than the requirements when buying options because of the higher risk to the broker or exchange.
   Here again, we find that naked short options will demand the highest margins, and another reason to use limited risk strategies as part of your crypto call option selling campaign, the limited risk to the broker reduces margin requirements.

Variations on the crypto call options selling strategy

While it’s possible to simply sell calls “naked”, we do not recommend this. There are many limited risk variations on this strategy which are beyond the scope of this article. To keep things straightforward, easy to understand and implement for any trader with any sized account we encourage traders to use the limited risk variations below.

1. Covered Call Strategy: The covered call strategy is one of the most popular option selling strategies because of its simplicity, limited risk if the value of the underlying asset rises significantly and its ability to generate income.
   This strategy is used when a trader owns the underlying asset such as a stock, ETF, cryptocurrency, etc., and a call option is sold against this asset. By selling the call option against their holdings, traders collect premiums while still benefiting from some upside price movement in the underlying asset.
   As demonstrated by the above risk/reward profile, the potential gain of a covered call is capped, but so is the “loss” if the underlying asset price was to increase above the short call strike price.
2. Leveraged Covered Call: Also referred to as a “poor man’s covered call” or a “synthetic covered call”, this strategy is identical to a standard covered call, but instead of owning the underlying asset, the trader instead purchases a long-term call option and sells the call against that.
   This strategy should be handled differently in terms of when to close the campaign because the value of the long call will begin to lose time value as it nears expiry.

Once traders are comfortable with one or both of these strategies, it’s possible to begin exploring other short-side income-generating strategies applicable to particular market conditions and individual trader biases.

Short Crypto Call Option Campaigns Historical Performance

While there are many commonly held “systems” to selling calls as a strategy pertaining to strike price, delta, time frames, etc., the truth is that market conditions will ultimately dictate performance results.

When talking about the covered call and leveraged covered call strategies, it should be noted that the biggest threat to the trader is when the underlying asset price falls significantly, not when the price rises significantly.
We do have ways that we can build downside protection into the covered call strategy, but for now, let’s just take a look at the past year’s results for both BTC and ETH when selling calls at specific deltas and time frames to determine the most successful variation on the strategy.

Note that this data shows each option taken to expiry and is cash settled with no adjustments to the position regardless of the price of the underlying asset. Also, our preferred cryptocurrency options exchange is Deribit and at the time of this writing, in order to trade BTC options for example, a trader must have BTC in their account (you are unable to sell BTC calls if you only had USDC in your account for example).  This means that by default, you can always sell covered calls vs naked.

The chart on the left side shows the value of the portfolio vs having held the underlying only. The blue line is the portfolio value (PV) of holding 1 BTC or 1 ETH and the yellow line is the PV of holding 1 BTC or 1 ETH and selling a covered call against it. The chart on the right side shows the difference between the two values. The time period covered is June 2022 to June 2023.