Established New Covered Call on Ethereum with Futures, Potential income return 4.9% in 15 days

On June 15, 2023, I established a kind of a covered call on Ethereum, using a futures contract on the Deribit trading platform. Buying 1 ETH perpetual futures contract at $1,653 and simultaneously selling one call option with a June 30 expiry and a strike price of $1,700. For this trade setup, I was rewarded with 0.021 ETH / $34.71, and in the case, a strike price of 1700 will be touched on the expiry I’m looking to book a potential profit of $81 in just 15 days.

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 I come up with:

• BOT 1 ETH-PERPETUAL 1653 USD

• SLD 1 ETH JUN 30 '23 1700 Call Option 0.021 ETH

Perpetual futures are traded with 50x margin on the Deribit trading platform, and to control futures worth 1 ETH I was required just 1/50 in margin collateral, or to set up this trade it was enough with about 0.02 ETH / 33.06 USD + 0.12 ETH / 198.36 USD margin for 1 call options.

Total investment: 231 USD

What happens next?

On the expiry date, June 30, 2023, ETH is trading under $1,700 per coin -  options expire worthless and I keep premium - if ETH trades above $1,700 I must pay the difference between spot and strike price.

Say ETH expires at $1,850. I would need to pay a difference of $150 in crypto itself (150/1700) or about 0.088 ETH.

But as I additionally have a perpetual future established at $1,653 I will gain from this future contract $197 or converted to crypto 0.1064 ETH

Of course, I should manually close the futures position at the time of expiry.

In case this call position will get assigned at $1,850 I will earn

0.021-0.088+0.1064 = 0.0394 ETH / 72.89 USD

That’s quite an impressive potential return on investment of 31.55% in 15 days

Now, the biggest drawback from such trading, as always with covered calls itself is a significant price drop, which might be even more painful when trading on margin with leverage.

Just for the illustration let’s model what happens if Ethereum drops to $1,500 (such a scenario is quite possible).

IF ETH expires at $1,500. I would keep the premium of 0.021 ETH

But I would also feel the pain from the perpetual future established at $1653 where I would lose from the future $153 or if converted back to crypto 0.102 ETH

In case this call position will expire at $1,500 I will lose

0.021-0.102 =-0.081 ETH / - 121.5USD

Of course, that is just a paper loss, and as long I will keep the future positions open I can still trade calls against it, but it will be much harder to find decent strike prices + additionally I will feel the pressure on margin, or I will need to deposit additional ETH to keep this position afloat.

Future trading on leverage can be very dangerous - you have been warned!

Feel free to send me a reply if you have any questions!

In case I will close this position with a profit, I will reinvest all profit into NIO shares!