Earning 5% APY on your long term holds? You can do better with CRYPTO COVERED CALLS.

Earning 5% APY on your long term holds? You can do better with CRYPTO COVERED CALLS.

By ethaniel | Theta Gang | 4 Dec 2021






Are you long ETH or BTC? I mean… actually long? Are you planning on holding for a while no matter what happens to the price? If you’re a believer in the long term potential and growth of crypto and DeFi then you probably don’t bat an eye anymore when the price drops or rises. You have probably been perfectly comfortable sitting on your coins for months or years already and aren’t in any sort of rush to sell. If that’s the case, then I’m going to make an assumption:

You’re probably familiar with “crypto interest accounts”. You also probably know that many of them operate on peer-to-peer lending and can get you a pretty tidy sum for lending out certain coins. If you’re not familiar, well, that’s pretty much the gist of it. Unfortunately, the top two titans ETH and BTC aren’t typically yielding the best rates. We’ll look more closely at this issue in a minute.

Today I want to share with you an alternative strategy for long-term holders that can significantly outperform the current interest rates. I want to teach you about covered calls! If you have some stock market experience and you’re getting really excited right now because you didn't know it was possible with crypto, I’ll save you the scrolling: https://app.ledgerx.com/. Otherwise, I am here to explain. Let’s go!

The Current Landscape


Feel free to skip this section if you already know that getting 1-5% annually on your BTC or ETH sucks and just want to learn the alternative!

Crypto interest accounts are pretty cool. Sure, most of them are centralized and will offend the purists, I know, but they’re still great in my eyes for one reason: The average person is finally able to be on the other side of a lending agreement. That privilege has always been exclusively available to the ultra rich, because they know how powerful it is! To do this in fiat currency in the USA, you have to be an “accredited investor” (definition). By law, it’s restricted to people with very high incomes or a $1 million dollar net worth. Seriously, you’re not legally allowed to make the world’s easiest profit unless you’re already rich! I’ll save the rest of my rant for another day.

DeFi implementations of peer-to-peer lending are going to rock the world, but centralized options like Nexo, BlockFi, or even Gemini Earn are still a great start. I love them for stablecoins, but if you’ve taken a look you’ve probably seen the abysmal rates for ETH and BTC. Why? Because so many people are long-term holders of those coins. There’s a large supply of people wanting to lend them out and a smaller demand for lended coins. (I’ll let you in on a little secret: people that borrow crypto are *usually* short-sellers. People that borrow stablecoins have way more uses for them. See why the demand differs?).

Anyways, about those terrible rates:


Source: https://www.coininterestrate.com/ as of 12/2/2021.


I’ve sorted by ETH because that is what I’ll be using for all of my examples today.

I’m not personally familiar with most of the names on that list. I recognize a few and I cut it off at Nexo, which I do know and would trust. You’ll notice that most of these interest rates are ranges. Account holders typically have to jump through hoops to get boosts to their rates, some of which are tough or just impossible depending on where you live.

But let’s be generous and assume that the average person could find a platform to earn 5% on their ETH or BTC (I tried, but I live in NY and most of these platforms will not allow me in).

5% annually is better than nothing, sure, but it’s lower than most investment averages. How hard would it be to double that by doing a little bit of extra work? Not very hard at all.

Fundamentals of Covered Calls


Warning: These fundamentals are important and I may not be the best at explaining this. If you read this section carefully a couple times and still don’t understand, please look around the internet. I’m sure you can find far more intelligent people than me to teach you! This is a very well established stock market concept that finally applies to crypto, so most resources out there will be about covered calls on stocks.


In the U.S. stock market, a call option is a financial instrument that represents the right (but not obligation) to purchase 100 shares of a specific stock for an agreed upon price at any time before a date of expiration. A “European” style option limits the right to purchase to only the day of expiration.

There are three important data points in a call option:

  • Strike Price
  • Expiration Date
  • Premium

The strike price is the agreed upon sale price. If stock XYZ is currently valued at $10 per share, but Alice believes it will hit $14 within 1 year, she might purchase a call option with a strike price of $12. This will give Alice the right to purchase 100 shares of XYZ for $12 per share at any point before expiration.

The expiration date represents the date upon which the option expires. Since Alice predicted XYZ moving to $14 within 1 year, she might purchase her call option with an expiration date of 1 year away.

The premium is what Alice is willing to pay someone else for the call option. In this example, let’s imagine that Alice is willing to pay $50 for this contract. Remember, her expected value of 100 XYZ in 1 year from now is $1400. She can subtract what she’d pay for the shares if she is right (the strike price * 100 shares) and the premium and still make a profit: $1400 - $1200 - $50 = $150 profit.


This hypothetical option is called out-of-the-money, or OTM, because the strike price ($12) is above the current market price of XYZ ($10). Nobody would exercise that call option to buy at $12 when they can buy at $10 on the open market. It won’t gain any intrinsic value until XYZ rises above $12. And yet, the option still has value before that time. This value is built by a variety of factors, but one of the most substantial is time value. Put simply, Alice is willing to pay the $50 premium because she has a whole year to work with. But who is going to sell Alice the call option?

Bob owns 100 shares of XYZ. There are many reasons why Bob might want to sell the call option that Alice is looking for, but let’s just imagine that he thinks XYZ will stay close to $10 for the next year. If he’s wrong, he bought XYZ for $5 per share last year and would be perfectly happy if Alice exercised her right to purchase them for $12 per share. If he’s right and Alice is wrong, then Bob will get to keep the whole $50 premium when the option expires in 1 year.

In this example, Bob has sold a covered call and received premium. It is called a “covered” call because Bob’s brokerage will place a hold on his 100 shares while the contract is open. This guarantees that Bob can actually sell the shares if Alice exercises her right to buy them.

How did Bob and Alice define the time value, and therefore the premium, when they entered their agreement? Well, one of the biggest factors would have been XYZ’s volatility. Premiums are high when an asset is volatile, and low when it is stable. If you think about it, this should make sense… if XYZ was known to swing up and down 5% per day, then Alice would have a better chance of reaching her price target of $14 and would be willing to pay more. If volatility was high enough, Bob could have sold his $12 covered call that expires in 1 year for $200. Or, he could have sold one for $50 that expires in just one month. High volatility increases the value of the time and the premium. 



Know any volatile assets that would be good candidates for high premium? Own some ETH and BTC?

In a minute, we will look at every single possible outcome of Alice and Bob's deal, but first let's introduce the platform for trading options on crypto.

FTX US Derivatives (LedgerX)


Call options on ETH and BTC are tradeable on FTX US Derivatives (Formerly LedgerX). This platform uses standard KYC and is available in the USA, even in NY! For every buyer of a call, there must be a seller of a “covered” call. FTX does not allow naked calls, so you must have the collateral held for every call sold.

Don’t have enough crypto to sell an option for 1 whole ETH or BTC? Don’t worry! Each contract on FTX only represents the right to purchase 0.01 BTC or 0.1 ETH. These smaller chunks make derivatives (options) accessible for every investor!

There is a flat $0.15 fee per contract sold. As far as I can tell, this is quite reasonable even for my smaller accounts.

The UI is very simple and easy to use.



Every Possible Outcome


Let's move Alice and Bob into the 21st century and have them exchange a call option on ETH. This time, Bob has just taken 1 ETH out of his crypto interest account and deposited it into FTX. Alice thinks that big news will cause ETH to rise spectacularly this month. She believes ETH could skyrocket to above $8500.

For this scenario, I will use the current prices of ETH and options on FTX (12/2/2021). ETH is just shy of $4500 and we will look at a call option with an $8000 strike price, with 28 days until expiration. Here is the order book for that call:


To be conservative, let’s assume that Alice is among the orders for $55 and Bob wants to lock in a sale at that price. He could probably place an ask at $75 and get filled in a few hours, but let’s look at what the market can currently guarantee. Alice and Bob make a $55 deal for an $8000 call option that is good for 28 days.

Here are all of the possible outcomes, using today's price of $4500 as the benchmark for each scenario.


If Bob really was going to hold his ETH for another year regardless of any price changes, then the only risk he assumed in this deal was the risk of lost profit in the 4th scenario: the scenario where he profits $3555 by selling to Alice when he could have profited $5500 by selling on the open market. Sounds like a pretty good problem to have, right?


(GIF) Bob when he gets assigned


Calculating Earnings


Our goal in this exercise was to find a covered call that earned us more than double a 5% annual crypto interest account. Let’s see how Bob did.

Bob received his $55 premium immediately when he sold the covered call. At the time of their deal, ETH was valued at $4500. So his instant earning is $55 / $4500 = 0.012 = 1.2%. Even though he receives cash up front, the option still has value and will decay throughout the month. If he were to find and sell similar options each month, he’d be earning 1.2% * 12 = 14.6% in 1 year.

When picking which option to sell, you must do the simple calculation for all of them to find the right earning amount for your goal, and then decide if it is a worthwhile deal for you. The more aggressive you are, the higher your chance is of missing out on a big upswing and having to sell your crypto. Let’s evaluate the other strike prices for the same expiration date as Bob’s covered call and see what the choices are.

For the simplicity of this first tutorial, I am going to only include OTM options and I am going to calculate the sale price using the mid, and not the bid. In my experience, I can usually get the mid within a couple hours. The monthly earning is in green on the right.


You can compare multiple expiration dates too, by calculating a daily return for each and comparing that.

You do not have to put everything into one strike, I spread my covered calls disproportionately across multiple strikes, with most of them aiming to earn 1.5-2% monthly. I only like selling options with less than 2 months until expiration. Anything longer makes big moves in prices harder to expect. I wouldn’t recommend selling options with a year until expiration, no matter how big the premiums are, because that is a huge amount of time for things to drastically change. A couple weeks or months is more manageable.




This strategy is great for long term holders that can handle the “risk” of getting assigned. It might seem great to enter an agreement to sell your ETH for double its current price 1 month from now, but if you actually get left in the dust it might sting more than you expect. Take some time to really evaluate how you’d react to that possibility.

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Discussing strategies for collecting premium through theta on cryptocurrency derivatives

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