Crypto options can be used to generate a fixed income (yield) as long as the underlying asset price does not rise above the option short call Strike Price.
Why would you want to do this?
You wish to HODL a token (e.g. BTC) while generating some yield at the same time.
Example
- Say you are currently holding BTC (Bitcoin) in your wallet.
- The current BTC price is $45,000.
- You expect a moderate price appreciation of BTC, of around $5,000 in the next 3 months.
- While hodling BTC to ride this wave, you wish to generate additional yield.
How to use Options to generate yield?
A way to generate yield on your BTC is by selling a Call Option.
In this scenario, you decide to sell a one-week BTC Call Option at a Strike Price of $55,000.
The price of the option is at 500 USDC. As the seller, you receive the premium upfront (i.e. your account will immediately get credited 500 USDC after executing the trade). Your BTC will be held as margin.
Where is the yield?
Your one BTC has earned you 500 USDC over one week, which is 57.7% annualised on the current BTC price.
What happens if the price of BTC drops?
Should the BTC price drop or only appreciate modestly as you predicted (ie. is below $55,000) by the expiry date, you keep the $500 premium as well as any BTC price increases.
What happens if the price of BTC rises?
Should the BTC price rise (e.g. to above $55,000) by the expiry date, you still get your $500 premium, but your BTC gains are capped at $55,000. This means you must pay the difference between the Strike Price and the Spot Price (e.g. $60,000) to the Call Option Buyer.