🔥 If you're looking for a way to earn extra income, selling call options can be a powerful strategy. But beware: selling naked calls can be risky. Here's what you need to know.
💰 Selling call options gives you the ability to earn premium income. But if you sell a naked (unhedged) call, you're taking on unlimited risk since you're obligated to sell the underlying asset at a preferential price if the buyer exercises the option.
🤔 So what's the alternative? You can sell covered calls, which involves selling call options on an asset you already own. In TradFi, this is considered "safer" since:
- Downside is NOT unlimited (but still substantial)
- Markets tend to go up (this is a bullish strategy)
The payoff of selling a covered call is the same as a naked put. (Bonus point: covered call = naked put = Uniswap LP 🤯)
🔍 To figure out which strategy is right for you, it's important to backtest and analyze past data. Let's analyze what periodically selling naked ATM ETH calls over the last 2 years might look like!
2/11 Let's backtest *hypothetical* DeFi call options (wen Panoptic? 😉)— Panoptic (@Panoptic_xyz) March 15, 2023
🗓️ Jun '21 - Feb '23
⚖️ Periodic rebalancing (day, week, or month)
1. Buy at-the-money (ATM) call option
2. Exercise/close at end of period
3. Pay LP fees as premiahttps://t.co/NthYyRBK7K pic.twitter.com/wSkTtHWBXJ
Anyone will be able to sell options on Panoptic for any asset at any strike. Panoptic options even have an "effective Time To Expiration"👇 This means you can customize your Panoption to sell "dailies", "weeklies", and "monthlies". Let's backtest these 3 strategies!
7/12 So how do I buy a 0DTE on Panoptic?— Panoptic (@Panoptic_xyz) March 29, 2023
I thought Panoptions don't expire?
That's right! But on Panoptic, you can adjust the "width" (r) of your Panoption to correspond with Time To Expiration (TTE):
Wider range → longer TTE
More volatility → shorter TTE
See math below 🤓👇 pic.twitter.com/XAbxaMmnWa
Backtest #1: Selling (naked) calls on ETH every week
- Earned 126% in premia
- Lost 132% from calls being exercised
→ Total PnL: -6%
(Compare to ETH HODL: -32%)
Unfortunately, our strategy wasn't profitable. What if we tried different rebalancing periods?
Backtest #2: Selling (naked) calls on ETH every day/week/month
- Weeklies: -6%
- Monthlies: -28%
- Dailies: -57%
Wow...dailies & monthlies did even worse. Let's try something typically seen as "less risky" — covered calls!
Backtest #3: Naked calls vs. covered calls
- Naked calls: -6%
- Covered calls: +6%
(The fact that they are exactly opposite is a coincidence.)
Covered calls did better...but why?
Notice how naked calls (blue curve) performed great in May 2022 — during the Terra collapse and bear market!
- Bull market → naked calls 👎
- Bear market → naked calls 🚀
Let's test this out on one of the biggest bear markets: the UNI-ETH price!
In the spot markets, UNI has massively underperformed ETH. That makes the UNI-ETH price a bear market. So what happens if you sell naked calls on UNI-ETH? Answer:
- 😎 Dailies: +55%
- 😄 Weeklies: +54%
- 🙂 Monthlies: +38%
- Naked calls have unlimited risk
- Naked calls are bearish and do well in 🐻 markets
- Covered calls are bullish and do well in 🐂 markets
- ⛽ Ignores gas/swap fees/commission
- 💲 Assumes premia = LP fees
- ❓ This is hypothetical — you can't sell calls on Uniswap (Panoptic soon 🤫)
- 📢 None of this should be taken as financial advice.
- ⚠️ Past performance is no guarantee of future results!