Bitcoin Call Option Writing Makes a Comeback as Cash and Carry Fades

Traders are once again selling bitcoin call options to generate yield as the market downturn has reduced the appeal of the cash and carry arbitrage strategy. Selling call options, which offer insurance against bullish price moves, has become popular as the futures premium has collapsed. One observer notes that traders are selling $80,000 BTC call options expiring at the end of May, indicating a preference for higher strike prices and reduced risk exposure.

Resurgence of Bitcoin Call Option Writing as Cash and Carry Strategy Wanes

Amidst recent market fluctuations, the practice of selling bitcoin (BTC) call options has reemerged as a preferred yield-generating strategy, signaling a shift away from the previously popular cash and carry arbitrage.

Return to Call Option Writing

Traders are actively selling higher strike, out-of-the-money bitcoin call options, offering insurance against bullish price movements in exchange for a premium. This approach differs from cash and carry arbitrage, which involves buying the underlying asset while selling futures contracts at a premium.

Decline in Futures Premium

The appeal of cash and carry arbitrage has diminished due to the collapse in the bitcoin futures premium. This discrepancy between spot and futures prices has narrowed significantly, reducing the potential returns from this strategy.

Renewed Demand for Call Option Selling

In contrast, the implied volatility index (DVOL), a measure of expected price volatility, has declined, indicating an increase in demand for writing options. Traders are now opting to sell call options with higher strike prices, reducing their risk exposure while collecting premiums.

Out-of-the-Money Call Options

Option sellers are focusing on out-of-the-money call options, which have strike prices well above the current market rate. These options are less likely to be exercised, allowing traders to collect premiums while limiting their downside risk.

Impact of Spot Market Trends

The renewed interest in call option selling coincides with a recent decline in bitcoin's spot price, which has broken out of a consolidation range between $60,000 and $70,000. This volatility has contributed to the decline in demand for spot exchange-traded funds and a strengthening dollar index.

Shift from Cash and Carry to Call Option Writing

QCP Capital, a Singapore-based investment firm, has observed a significant pivot among customers towards option selling strategies. This shift reflects the diminished returns from cash and carry arbitrage due to the low futures premium.

Higher Returns No Longer Justified

The returns from cash and carry bets are no longer significantly higher than the yield on U.S. Treasury notes, which offer a risk-free rate of 4.61% at the time of publication. This lack of a premium has diminished the attractiveness of the strategy.

Conclusion

The resurgence of call option writing marks a shift in yield-generating strategies among bitcoin traders. The decline in futures premium has weakened the appeal of cash and carry arbitrage, while the increased demand for writing options has driven the implied volatility lower. Traders are now opting for out-of-the-money call options to reduce risk and enhance returns. These trends reflect the evolving dynamics of the cryptocurrency market and the ongoing search for profitable investment strategies.