Bitcoin (BTC) ‘Call Writing’ Gains Popularity Again as Cash And Carry Approach Fades

In the constantly shifting landscape of cryptocurrency investment strategies, there seems to be a notable trend change among bitcoin (btc) traders. The previously popular cash and carry trade, which involves buying an asset in the spot market and simultaneously selling a futures contract on it, appears to be losing its luster. Traders are now gravitating towards an alternative method to capitalize on market movements: call writing, specifically selling out-of-the-money (OTM) call options at ambitious strike prices.

This strategy, as highlighted by cryptocurrency market maker Wintermute, involves selecting strike prices that are considerably higher than the current market price, such as the $81,000 mark targeted for the end of May. These strike prices sit well beyond Bitcoin’s recent price range, making it unlikely that these options will be exercised. By selling these OTM call options, traders are able to collect premiums upfront, effectively earning income while also mitigating their risk exposure in a highly volatile market.

But why this shift away from the cash and carry strategy, and why now? Several factors contribute to this transition. Firstly, the volatility inherent in the cryptocurrency market, particularly with Bitcoin, creates an environment ripe for options trading. The uncertainty around Bitcoin’s price trajectory encourages traders to seek strategies that offer income with defined risk, such as option selling.

Furthermore, the decline in annualized futures premiums — a key component of the cash and carry trade’s profitability — has rendered this strategy less appealing. In contrast, the options market, with its ability to leverage high strike prices, has become a more attractive venue for risk-adjusted returns. The decrease in futures premiums can be attributed to the market’s maturation and the corresponding decrease in volatility, at least relative to Bitcoin’s early days. As Bitcoin gradually transitions from a speculative asset to one with broader institutional adoption, its price movements are expected to become less dramatic, altering the profitability landscape for various trading strategies.

Another aspect bolstering the appeal of call writing is the premium collected from selling these options. In periods of high market volatility, the premiums on options can be significant, providing sellers with a relatively attractive income stream. This is especially true for OTM options, where the probability of the option being exercised is low, but the premium can still be substantial due to the uncertainty factor.

Moreover, the sophistication of traders and investors within the cryptocurrency space has grown. Many are now more knowledgeable about advanced trading strategies and derivatives, leading to increased participation in the options market. This heightened involvement contributes to the liquidity and depth of the market, making it easier for large positions to be taken without undue market impact.

However, this strategy is not without its risks. The main hazard for sellers of OTM call options is a sudden, unexpected surge in Bitcoin’s price, which could result in options being exercised and forcing the sellers to either deliver the underlying asset at a loss or buy back the options at a higher price. Despite this risk, many traders find the risk-reward ratio favorable, especially in a market known for its unpredictability.

In conclusion, the shift towards call writing strategies among Bitcoin traders underscores the market’s evolving nature and the continuous search for profit opportunities amid changing dynamics. While the cash and carry trade has played a significant role in the investment strategies of cryptocurrency traders, the growing interest in options trading, particularly in selling OTM call options, signifies a new chapter in the quest to navigate the complexities of the crypto market. As traders adapt to the changing landscape, these strategies will likely continue to evolve, reflecting the ongoing maturation of the cryptocurrency market and the diverse approaches participants take to managing risk and seeking returns.