Alternative to Crypto ETF - selling covered calls with BLOK

A couple of days ago Alfred wrote me and asked me what are my thoughts about selling covered calls on crypto-related ETFs.

As this is something I’m interested in myself, I decided to take a look. Personally, I’ve found that one of the best ways to invest with crypto is dollar-cost averaging buy and hold for a longer-term period.

Also if there is a chance to lend your coins, this is something to grow your wealth.

I have tried selling options with crypto itself on deribit platform, but unlike dollar-cost averaging or lending, this has turned out like a bad experience for me.

If there is a thing I have learned from trading crypto options - I’m waiting for a real US-listed BTC, ETH, or any other crypto-listed ETF.

Anyhow, as this is a topic I’m interested in myself and I decided to look through.

Here is the original message from the reader:

I'm interested in covered calls for Bitcoin/Ether.  I'm in the US, and have a ledgerx account.  Options burn me every time.

So, there's covered call ETFs for stocks.  But I can't find anything for crypto.  I read your article saying that Derebit pays in crypto, so it's not ideal.  But why not doing covered calls for the trust stocks?  GBTC, OBTC (maybe), ETHE?  It gets complicated because of the "premium" (which is actually a discount right now).  But with covered calls, shouldn't that be fairly negated?

How would one set something like that up?  I'd much rather have a covered call etf based on these trusts, but I don't think they exist.  So, what are the steps for something one would need to do, say, once a month (ideally)?  I'd rather not have to actively manage it.

GBTC, OBTC, and even ETE probably are great tools to invest in crypto assets, by not directly buying crypto, but unfortunately, we cannot sell options on any of these (at least not at the time of writing this)

Again, if you are looking to buy BTC or ETH, why not buy it directly from sites like Coinbase?

We exchanged a few emails, and then Alfred mentioned BLOK ETF

I've noticed they move pretty closely with the price of Bitcoin. 

Now, unfortunately, there is no pure-crypto-mining etf, these are the best you got: https://seekingalpha.com/news/3704726-blockchain-crypto-etfs-rally-on-the-back-of-bitcoin . 

However, if you ask me, there's a pretty darn close correlation, at least with BLOK which is old enough to have the data

Again, I would prefer something more pure-crypto. Their two biggest holdings are PayPal and Square after all.  But it may be the best you got, other than some or all of those 12 mining stocks (and I can name probably another 10 mining stocks than in that link, but they are all less than a year old or small) which may map better.  If I had the liquidity maybe I'd do covered calls on all of the mining stocks too, but I don't.

So, do you agree?  And if so, how would one do a covered call scenario with BLOK?

As I have been trading options with blockchain stocks, there is that RIOT stock... the price was like $2 when I started with selling put options, now this one is like $40 and was $60 (in less than 6 months) - but IMHO RIOT is not the best way to play options

So BLOK ETF and selling covered calls on it

I see the stock was trading $45.59 on June 11

You could buy 100 shares paying $4,559 and sell July 16 expiry call option with a strike price of $46 (that would be near the money, just 41 cents higher than your buy price) and get paid for that $2,33 per share or $233, that makes you 5.11% return from your investment in ~ 40 days.

What happens next?

If on the expiry date BLOK is trading above $46 - your 100 shares get called away and you realize your max gain 233+41, or $274

If BLOK is trading below $46 - you keep your premium $233 and sell more covered calls to lower your cost basis, generate more income, call it as you want.

You can choose other strike prices as well, say 50 (you will get less premium, but you keep something for price appreciation) or if you don't feel secure about this purchase you can sell in the money call option (ITM) say $40 and pocket more premium  (in case BLOK drops from 45 to under 40, you will feel happy)  

From the downsides I should add - BLOK has only monthly options, no weekly. not saying this is bad, but I prefer trading options with stock and ETF that have both weekly and monthly options

Would I trade covered calls with BLOK ETF? Nah, probably not, but you never know. I’m still waiting for fo the first crypto, most probably it will be BTC ETF listed on US exchanges, before investing with covered calls. Meantime I still prefer picking up some coins directly from the crypto exchanges