Using a Covered Strangle Strategy on Bitcoin to Enhance Yield by 17%

Article by Omkar Godbole

• 10x Research suggests selling out-of-the-money (OTM) call and put options tied to bitcoin while holding the cryptocurrency in the spot market.
• The so-called covered strangle strategy will generate a 17% yield, in addition to the upside from the spot market holding

Bitcoin (BTC) investors looking to generate extra income in addition to their spot market holdings should consider setting a “covered strangle” options strategy, research firm 10X, which has an 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 parlance) above the underlying asset’s going market rate and selling an OTM put at strikes below the underlying’s spot market price.

The premium received for selling/shorting the call option, or protecting the counterparty from price rallies, and selling the put or insurance against downtrends, represents the extra yield.

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, while holding the cryptocurrency in the spot market.

“Our favorite strategy is to buy bitcoin Spot, Sell 100,000 strike call, and Sell 50,000 strike put for the December 2024 expiry. Selling the call could yield 11%, and selling the put could yield 6%,” Markus Thielen, founder of 10x Research, said in Monday’s client note, detailing the suggestion.

“Hence, this strategy provides us with either a 17% downside buffer or 17% more yield, depending on where BTC closes in December, plus we would capture all the upside (or downside) for bitcoin,” Thielen added.

The strategy is preferred when the market outlook is bullish, but the uptrend is expected to unfold slowly, keeping implied volatility or investors’ expectations for price turbulence low. In such conditions, options, particularly OTM call and put options, bleed value faster as expiry nears, making money for sellers.

The strategy, though appealing, is now without risks and requires a high tolerance for risk. That’s because the risk is leveraged below the level at which the put option is sold, in this case, $50,000.

“Below the lower strike price, both the long stock and short put incur losses, and, as a result, percentage losses are twice what they would be for a covered call position [buy spot = sell OTM call] alone,” Fidelity said in a ‘covered strangle” explainer.

In other words, 10x’s strategy is for those who believe bitcoin’s bull market will progress slowly and corrections, if any, will not see prices drop below $50,000. As of writing, bitcoin changed hands at $67,170, representing a 58% year-to-date gain, CoinDesk data show.

Several analysts, including Thielen and Arthur Hayes, former CEO of crypto exchange BitMEX, expect a slow grind higher.