Bitcoin ‘Call Writing’ Back in Vogue as Cash And Carry Strategy Loses Shine

As a researcher studying financial markets, I would describe selling a call option as providing protection against potential price surges for the buyer, while collecting a fee, referred to as a premium, in the process. This premium represents the most significant profit that can be earned by the seller if the market prices remain unchanged or decline.

As a researcher studying trading strategies, I’ve observed a prevalent approach among traders. They sell out-of-the-money call options at elevated strike prices, such as the $80,000 mark for May’s end. These strike prices lie beyond the current price highs and have a lower probability of being exercised. By employing this strategy, traders are able to gather premiums while simultaneously decreasing their risk exposure.

Should the price of bitcoin fall below $80,000 by May’s end, the sellers have pocketed the entire premium paid. Conversely, if bitcoin rallies above that threshold and the sellers fail to protect their positions or purchase more through long-term investments, they risk incurring losses.

The decrease in Deribit, the prominent crypto options exchange’s Implied Volatility Index (DVOL) indicates a resurgence of interest in buying bitcoin options. This index represents the market’s prediction for bitcoin’s price fluctuations during the upcoming month.

The level of implied volatility can be affected by the amount of interest in options and a greater inclination toward selling contracts tends to decrease this measure.

As an analyst, I’ve noticed some significant changes in the Daily Volume Open Interest Ratio (DVOL) for both Bitcoin and Ether over the past 10 days. Specifically, the DVOL for Bitcoin dropped from approximately 72% to 59%, based on data from TradingView. Similarly, Ether experienced a decrease from around 80% to 60%, but it rebounded back up to nearly 80% this week. These fluctuations suggest shifts in market dynamics and potential changes in investor behavior.

Last week, QCP mentioned in a market report that the price of spot goods has been confined to a narrow band, leading to a decrease in basis returns. Consequently, numerous clients have shifted back to adopting option selling tactics on the trading desk.

Bitcoin experienced a significant drop on Wednesday, reaching a low of $56,600. This decline marked the end of a month-long price range between $60,000 and $70,000 as several factors came into play. Among these were waning interest in spot Bitcoin exchange-traded funds (ETFs) and a rebounding US Dollar Index.

Cash and carry yield tanks

In a cash and carry arbitrage, traders purchase the underlying asset in the spot market at the same time as they sell corresponding futures contracts when there’s a noticeable difference in their prices. This strategy allows traders to profit from the price discrepancy or premium without having to deal with the volatility linked to changes in asset prices.

The allure of this approach has significantly waned compared to the initial quarter due to a dramatic drop in futures premiums over the past few weeks.

As a crypto investor, I’ve noticed that the annualized premium for bitcoin three-month futures contracts on exchanges like Binance, OKX, and Deribit has dropped significantly, now hovering around the 5% mark. This is a noticeable decrease from the peak of 28% at the end of March. The same trend holds true for regulated futures on the Chicago Mercantile Exchange.

To put it another way, market-neutral investments, which were once believed to provide returns that noticeably surpassed those of the secure U.S. Treasury notes, are no longer doing so effectively. At present, the yield on the 10-year Treasury note, considered a risk-free investment, is at 4.61%.