Module 8: Crypto Options
Strategies for Income: Covered Calls and Cash-Secured Puts
Chapter 12 of 14 · about 6 minutes
12.1 Getting paid to wait
Mint held 1 BTC and planned to keep it for years. Mint also had some stablecoins set aside, hoping to buy more bitcoin if the price dipped.
"My bitcoin just sits there," said Mint. "And my stablecoins just sit there. Can either of them earn something while I wait?"
"Both can," said Hash. "By selling options. You'd become the insurer instead of the policyholder, collecting premiums. It's one of the most popular uses of options. It's also one of the most misunderstood, so let's be careful about what you're actually giving up."
12.2 The covered call
A covered call means holding an asset and selling a call option on it. The holding "covers" the obligation if the call ends in the money.
Mint holds 1 BTC at $100,000 and sells a 30-day $110,000 call for $2,765.
| BTC at expiry | 1 BTC value | Call obligation | Premium kept | Total | Change |
|---|---|---|---|---|---|
| $80,000 | $80,000 | $0 | $2,765 | $82,765 | −$17,235 |
| $100,000 | $100,000 | $0 | $2,765 | $102,765 | +$2,765 |
| $110,000 | $110,000 | $0 | $2,765 | $112,765 | +$12,765 |
| $130,000 | $130,000 | −$20,000 | $2,765 | $112,765 | +$12,765 |
The premium adds about 2.8% to the holding in a month if bitcoin stays below $110,000. But above $110,000, the gains are capped.
12.3 What you're really giving up
"Collecting 2.8% a month sounds amazing," said Mint. "That's over 30% a year."
"Only if bitcoin never rallies past your strike, and never crashes," said Hash.
| Risk | Explanation |
|---|---|
| Capped upside | In strong rallies, the covered call holder misses most of the gains, often in the months that matter most |
| Downside remains | The premium only cushions falls slightly; in a crash, the holding still loses most of its value |
| Asymmetric outcomes | Small, steady gains in quiet markets; large missed gains in rallies; large losses in crashes |
| Volatility risk premium | Premiums are higher when volatility is high, which is exactly when big moves are more likely (Chapter 6) |
In crypto, where big rallies are common, repeatedly selling covered calls can significantly underperform simply holding, during bull markets. It tends to work best in sideways or gently rising markets.
12.4 Choosing the call strike
| Call strike (BTC at $100,000) | Premium | Upside before cap | Character |
|---|---|---|---|
| $105,000 | ~$4,246 | 5% | More income, more likely to be capped |
| $110,000 | ~$2,765 | 10% | Balanced |
| $120,000 | ~$1,057 | 20% | Little income, rarely capped |
Many covered call sellers choose strikes with a delta around 0.2 to 0.3 (Chapter 7), aiming for a reasonable premium with a modest chance of being capped.
12.5 The cash-secured put
A cash-secured put means holding enough cash or stablecoins to buy the asset at the strike, and selling a put option. If the price ends below the strike, the put seller effectively buys the asset at the strike. If not, they keep the premium.
Mint holds $95,000 in stablecoins and sells a 30-day $95,000 BTC put for $3,948.
| BTC at expiry | Outcome | Effective result |
|---|---|---|
| $110,000 | Put expires worthless | Keep $3,948, about 4.2% on $95,000 for the month |
| $95,000 | Put expires worthless | Keep $3,948 |
| $90,000 | Put in the money: pay $5,000 | Net effect: like buying BTC at $95,000 − $3,948 = $91,052 |
| $70,000 | Put in the money: pay $25,000 | Like buying at $91,052, now worth $70,000: down about $21,000 |
"So if bitcoin dips, I effectively buy it at $91,052, which was my plan anyway," said Mint. "And if it doesn't, I get paid for waiting."
"That's the appeal," said Hash. "The risk is that 'buying the dip' can mean buying something that keeps falling. The put seller is committed at the strike, no matter how far the price falls."
Because most crypto options are cash-settled (Chapter 10), the put seller pays the difference in cash rather than receiving actual bitcoin. To end up holding BTC, Mint would buy it separately with the remaining cash.
12.6 The wheel
Some traders combine both strategies into a cycle often called the wheel:
- Sell cash-secured puts until the price falls below the strike and you acquire the asset.
- Then sell covered calls on the asset until the price rises above the strike and the position is called away.
- Return to selling puts.
The wheel collects premiums throughout. It works well in range-bound markets and poorly in strong trends in either direction: in crashes, you keep buying a falling asset; in rallies, your holding keeps getting capped.
12.7 Option vaults
On-chain option vaults, also called DeFi options vaults, automate covered calls or cash-secured puts. Users deposit assets, and the vault sells options on a schedule, often weekly, distributing the premiums.
Vaults are convenient, but they add risks:
| Risk | Explanation |
|---|---|
| Strategy risk | The same capped upside and crash exposure as doing it yourself |
| Smart contract risk | Bugs can cause losses (Module 1, Chapter 4) |
| Counterparty and auction design | Who buys the options, and at what price? Poor pricing reduces returns |
| Withdrawal timing | Funds may be locked until the current cycle ends |
| Advertised yields | Often annualised from recent weeks, which can mislead (Module 5, Chapter 7) |
12.8 Income isn't free
Node summarised the chapter. "So selling options gives you steady, small income, in exchange for taking on the risk of large, sudden moves."
"That's the insurer's business," said Hash. "Most months are quiet, and you collect premiums. Some months are disasters. Whether you come out ahead depends on pricing, discipline, and surviving the bad months, which is Chapter 14."
12.9 Try it yourself
Using today's options chain, calculate the premium and monthly percentage return for a 30-day covered call on 1 BTC at strikes 5%, 10%, and 20% above the current price. Then calculate the effective purchase price and monthly return for a 30-day cash-secured put 5% and 10% below today's price.
Finally, look back at BTC's price over the past 12 months and estimate how often each covered call would have capped your gains.
Key takeaways from this chapter
- A covered call sells a call against a holding, earning premium in exchange for capping upside.
- Covered calls cushion falls only slightly and can significantly underperform holding during strong rallies.
- A cash-secured put sells a put backed by cash, earning premium or effectively buying at the strike minus the premium.
- Cash-secured put sellers stay committed at the strike, even if the price keeps falling.
- The wheel combines both strategies and works best in ranges, poorly in strong trends.
- Option vaults automate these strategies but add smart contract, pricing, and liquidity risks.
- Selling options earns steady income in exchange for exposure to large, sudden moves.