Grayscale: Earning Bitcoin options income in a range-bound market

Author: Zach Pandl, Head of Research at Grayscale; Compiled by Shaw, Jinse Finance

Despite some positive signals in the market, we still cannot accurately predict how this current Bitcoin bear market will evolve next. If the price of Bitcoin has already formed a sustainable bottom and, before rebounding, maintains sideways trading in a range, a covered call options strategy can generate returns by leveraging Bitcoin’s volatility while managing spot exposure. A brief recap of the covered call options strategy: investors hold a spot long position and use it as collateral to sell call options, earning option premiums.

For example: suppose a covered call options strategy with a maturity at the end of 2026. If the Bitcoin spot price is $65,000 and implied volatility is 40%, the expected results are as follows:

• Approximate annualized return of about 22%;

• Positive returns can be achieved if the break-even point is above $58,500;

• When the price rises into the $72,500 range, the returns outperform simply holding Bitcoin spot.

In other words, in this scenario, if the Bitcoin price remains unchanged, investors can achieve an annualized return of about 22%; if, at expiration, the coin price is above $58,500, they also make a profit (Figure 1). The option premium provides both cash income and some downside protection. The trade-off is giving up part of the upside gains after Bitcoin makes a significant upward move. Once the Bitcoin spot price falls below the break-even point, the covered call strategy will incur a loss, but the loss will be smaller than a pure spot long position; the difference is equivalent to the call option premium received.

The simplified example above includes only Bitcoin spot and a single call option. In the market, multiple Bitcoin covered call ETF products achieve similar return characteristics by rolling and selling a basket of BTC call options.

Key takeaway: at the current price level, a Bitcoin covered call options strategy is likely to achieve substantial annualized returns of 20% or more; as long as Bitcoin maintains range-bound consolidation, this strategy has an excellent risk-reward profile.

Figure 1: When Bitcoin spot prices remain range-bound, a covered call options strategy is expected to outperform spot