Is the Bitcoin Covered Call Strategy the Perfect Strategy?
Our Bitcoin Covered Call 5x Strategy has been on a winning streak since its launch. Since the 5th of August, the strategy has made a profit 8 weeks in a row to earn an impressive 6.95% return over the past 2 months. Annualizing these returns would imply a remarkable return of 45% per annum(without compounding).
Is this the Perfect Strategy?
There is definitely no such thing as a perfect strategy, so we decided to dig into the strategy weaknesses.
From the backtest data we know previously there’s been a 96% success rate and a 4% loss rate. When exactly do these losses occur? Why do these losses occur?
Recently there have been multiple comments about how bitcoin’s IV and realized volatility has come down to their historic lows.
Many people seem to think low volatility leads to some kind of strong reaction in price which could potentially incur losses for a covered call strategy. So we decided to look into the data.
The following is a chart of Bitcoin’s price and the loss weeks from running the covered call strategy.
As you can see in the chart above, the losses occur when there is a sudden upwards reaction in bitcoin price. We can see there are large upticks in price during the loss weeks. However, the important question is whether these loss weeks are preceded by low levels of volatility.
So next we can add both IV and historic volatility to the chart to see if there are any patterns.
Overlaying IV(implied volatility) and HV we can see the losses don’t always occur during periods of low volatility. There are long periods of time with low volatility(below 50) where losses don’t occur as well.
You could also look at the relationship between IV and HV.
Looking at the results from the backtest, we can see that for loss weeks, the IV is quite evenly spread out and can range from below 50 to above 100. A better rule-of-thumb could be using the 14d HV value, and not entering the covered call strategy when it’s below 75. However, that would lead to significantly lower returns as you would not be earning premiums for more than half the year.
As you can see from the data, it’s not quite as simple as not entering a covered call when volatility is low. Other than when volatility is very high(+120), it’s difficult to say that IV has an effect on the profitability of the strategy.
In conclusion, the Bitcoin Covered Call strategy is definitely not a perfect one. There is no such thing as a perfect strategy, but due to the high volatility of the crypto markets and the speculative nature of bitcoin, covered calls have performed quite well over the past 3 years. We believe that it can continue to perform well until a structural change occurs. We plan to continue to research into maintaining our edge through better execution, tighter risk management and continuously improving our models.
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Disclaimers: The research is from a backtest, ie a simulation based on historic data. This post is not financial advice and please remember past performance does not guarantee future results.
