I need someone to poke holes in this plan of mine.
In the last few months the dividend for BITO has increased a lot. And it’s ultimately tied to the volatility of Bitcoin.
My question is:
If I sell a super super deep in the money covered call for a year or so out and I collect dividends from this, what is my real risk?
If I buy at 18$ and sell a 5$ call for 13$. I can get basically 4x the number of BITO shares which means 4x the dividend and the CC basically functions like a bond. Which is like 200% a year.
When the monthly dividend gets paid out both the stock and the call should drop by the amount that gets paid out right?
So 1$ div payment, 17$ stock and 12$ call. Now I have 1$ and the same 5 valued underlying.
If BTC goes up I make an even bigger dividend, if it stays flat I get payouts, and it would need to drop a huge amount for me to lose any on the CC.
The risks I see are
a) the dividend % drops. I get that this probably will happen.
b) there is a massive drop in BTC value and the dividend bleed causes BITO to drop below 5$.
c) The value of my call goes up? Being so far ITM I don’t see how this can happen? Can you be margin called on a CC? Or can you just ride it out if it goes underwater?
Posted by bbrbro
7 Comments
Bitcoin can go up
The risk is losing 100 shares per contract at a spot price significantly higher than $18
Volatility and dividends could drop. Bitcoin could significantly drop.
If the value of the call goes up then yes it’ll look red and scary, but as long as you hold the shares you can’t get margin called. If the other side exercises the call, or if you’re still holding at expiration and it’s still ITM, then your shares go away, but that’s not a bad thing in your plan.
Just hang onto those shares for the love of god
No actually I think you may be on to something
You have to weigh early assignment, the possibility of it going up (mentioned above) against the estimated dividend payment throughout the option expiration. To keep your shares you have to buy out of the option at a significant cost (if the underlying has increased) at expiry, or else you lose them.
My worry for bito ccs is that in a year bito is to $36 a share with 2$ a month divided and I had them called away, for a measly $15 in a one time premium.
Imo the question is do you believe in the long term play of Bitcoin, or do you want the short term realized gains.