This is not an investment advice and DYOR.
This post is the first one in a potential series of posts about this subject, and I will add the next one if the community shows interest and sponsors it.
A few words about me: I am a sound investor who dedicated three years of a full-time job learning how to trade derivates and volatility products. I am not an expert, but I did find a methodology ( after losing too many sats) that can hedge and monetize long volatile positions.
you can learn more about me here : https://asoundinvestor.com/
- If you are not based in the US and can use an options and derivatives platform, you can utilize it. (I hope regulation will change soon and you can do it in the US )
- you will need to learn the core principles of options, futures, and volatility. Where did I learn (for free)? https://www.tastytrade.com
- It requires a few actions a week, and if the market is very volatile, you need to act daily, whether on the weekend or during the day.
If those three points didn't kill your curiosity, let's get down to business.
The core concept is that we are trading against our long position. For example, if bitcoin is going up, we are winning on the increase in value, but we will lose on the offset trade but overall gain more. On the flip side, if bitcoin is going down, we are losing on the decrease in value but gaining on the offset trade, so overall we lose less. We create a tradeoff between some upside gains to protect the downside. This tradeoff will be a deal breaker for some people, but please be patient to understand why you can end up in a better situation in any case.
The idea is that we are trading against our bitcoin, not through a directional short ( borrowing spot bitcoin or using a future) but through selling a call option. They call it a covered call strategy, but it doesn't work precisely the same with bitcoin. In the most simple terms: You sell an insurance contract that expires after a period you decide and a probability for the event to occur that you feel comfortable with. If the event didn't happen, you would keep the premium. If it did happen, you are covered because you hold the asset, and after closing the option, you will be, in most cases, in some profit because of the increase in value. You can also resell the contract for additional time (rolling), giving you another chance to let the contract expire worthless.
It is essential to explain the core difference here. It is super difficult to know if bitcoin will go down or up at any given time and try to short it, but it is much simpler to determine that it won't cross $50K in the next 45 days.
You are selling a contract with a probability of 5% for that event to happen in the next 45 days. If you do it patiently over time, the premiums will pile up, and you will end up with more bitcoin, no matter its value.
Simple is not easy. There are many more factors here, but the point is that doing that over time in all market conditions can create a hedge and a cash flow engine. It can generate 15%-30% on the assets, and you can do it just on a small part of your holding.
It requires a learning curve, time, and discipline to keep the rules with no exceptions, but it can be worth your efforts.
Any interest?
If yes, in the next post, we can go into some core concepts: implied volatility vs actual volatility, Theta decay, Deltas and more.
Cheers,
gilac