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Sold 1 Call Spread on Ethereum + hedging with Futures - potential income of 0.29% in 1 Day
On November 29, 2022, I sold 1 vertical call spread on Ethereum cryptocurrency with an expiry set for tomorrow November 30, 2022.
For this trade, I got a premium of 0.00295 / ETH / $3.57 at the time of writing
Selling crypto options is pretty much the same as selling stock options, except they might be settled in crypto, require less capital, are settled European style (cannot be assigned before the expiry), and can go totally wrong.
This is not trading advice. Investments in stocks, funds, bonds, or cryptos are risk investments and you could lose some or all of your money. Do your due diligence before investing in any kind of asset
Here is the trade setup:
ETH-30NOV22-1250-C sell 0.0055
ETH-30NOV22-1300-C buy 0.002
For this trade, I got a premium of 0.00295 ETH (after commissions) or about 0.29% potential income return in just 1 day, if options expire worthlessly.
I actually don’t have 1 ETH, that’s why I opted for selling a vertical spread to limit my risk, I have deposited about 0.55 ETH and sold a vertical spread on it - if ETH will rise quickly my max loss will be limited to the long position.
To hedge against max loss - I'm planning to go along with the ETH futures contract if ETH touches $1,250. (more on that below)
What happens next?
On the expiry date, November 30, 2022, ETH is trading under $1,250 per coin - options expire worthlessly and I keep the premium and start over - if ETH trades above $1,250 on the expiry date, I pay the difference in crypto. Say ETH trades $1,300 (my max loss) on expiry, I need to pay the difference between the spot price and strike price, which is $50, or converted it back to ETH which would equal 0.04 ETH.
I would be left with 0.55559543+0.00295-0.04 = 0.51854543 ETH
As my initial investment was worth $735.83 (according to the EUR/USD exchange rates) my new ETH worth would be $674.05. I would lose -$61.78 or about -8.39% potential loss.
In case of a challenging leg, I will try to roll it up and forward, as my goal right now is to grow my Ethereum holding to at least 1 ETH coin.
Additionally, I'm planning to enter long trade with ETH futures if the price of $1,250 is touched. On the Deribit trading platform, I can enter trigger-based trade. In case I will be able to enter the trade at $1,250 and the strike price reaches $1,300.. I will actually make 0.04 ETH in the long future.
In theory - this is a zero-risk trade, in practice - it will ask very reliable execution plan if the $1,250 leg gets challenged.
P.S. Shout me back if you have any questions regarding crypto trades or you would want just to talk :)