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Covered Calls Tutorial

Covered Call is a strategy which consists of long position in futures contract (could also be long position in an asset) and short position in call option. We can distinguish two types of Covered Call:

  • Out-of-the-money Covered Call - investor (moderately bullish) has to sell out-of-the-money call option,
  • In-the-money Covered Call - investor (moderately bearish) has to sell in-the-money call option.


Assume that current futures price of one-week futures contract and BTCUSD exchange rate amount to $10,000. What is more, you are moderately bullish, you think that Spot Price is going to be a little bit higher in one week. Therefore, you want to take long position in futures contract (Quantity = 10,000) and somehow boost your profits, if the Spot Price in one week is in the neighbourhood of $10,000. You can enter an Out-of-the-money Covered Call strategy - beside taking long position in futures contract, you have to sell 5% (for example) OTM call options (Quantity = 10,000 as in the case of futures) with expiration date - one week.

Assume that above mentioned call option has following parameters:

  • Volatility = 100%
  • Strike Price = $10500 (~5% OTM)
  • Maturity = 1W
  • Quantity = 10,000

We enter a short position in that option.

Total premium for the above options equals to 0,03234191 BTC. Hence, the value of P/L of your portfolio has the following formula

portfolio P/L = Option Premium - Option Payoff + long futures P/L 

The chart below displays the relation between Settlement price (in one week) and portfolio P/L, futures P/L and option P/L.

If the Settlement Price is:

  • smaller than ~$9,700, then your portfolio P/L will be less than 0,
  • between ~($9,700; $10,500), then your portfolio P/L will behave like long futures P/L + Option Premium;
  • bigger than $10,500, then option will be exercised and your P/L will be constant (equal to option premium), because payoff of short call option would balance long futures payoff.

Covered Call as a take-profit order

Covered call strategy can function as a way to take profits for a pre-agreed price. In the example above, you effectively agree to close out your futures position at $10,500. If you traded futures, you would just sell all your contracts at that price. Using options, not only you don't have to - you will receive a premium for that!