Bitcoin Call Option Sales Surge Amid Market Downturn and Decreased Futures Premium

The recent market downturn has led to a resurgence in popularity for selling bitcoin call options, known as a yield-generating strategy, as the appeal of the cash and carry arbitrage diminishes. This strategy involves selling call options, which provides insurance to buyers against bullish price moves in exchange for a premium, the maximum profit a seller can earn. In late 2022 and early 2023, traders consistently sold bitcoin and ether call options at high strikes, earning additional income from their spot market positions. Currently, traders are selling $80,000 BTC call options expiring at the end of May, according to Wintermute, a trading firm. If the price of bitcoin falls below $80,000 before the expiration date, the seller keeps the premium received; otherwise, they may face losses if they fail to hedge or hold spot market longs. The renewed interest in selling bitcoin options is demonstrated by the decrease in Deribit’s implied volatility index (DVOL) from 72% to 59% in ten days, signaling increased demand for these options. QCP Capital also observed a significant uptick in BTC call option sales recently. The drop in the DVOL for both BTC and ETH reflects the rise in demand for these options, which typically decreases as preferred expiration dates approach. The recent fall in the value of bitcoin below $58,000, triggered by multiple factors, has reduced demand for spot exchange-traded funds and strengthened the US dollar index. This has led to a decline in the futures premium, making it less attractive compared to the yield on the 10-year US Treasury note, currently standing at 4.61%. Consequently, the market-neutral bets, previously lucrative, are now less profitable.