The iShares Bitcoin Trust exchange traded fund rose 4.3% on Wednesday. The IBIT bitcoin ETF also was added to the SwingTrader Portfolio.
IBIT seeks to generally reflect the price performance of bitcoin. Given the speculative sector in which it operates, the ETF has high volatility, which means high option premiums.
That can be great for covered-call traders.
IBIT Covered-Call Strategy
A covered-call strategy is one way to slightly reduce the risk on a long stock position while also generating some option premium. The catch is that upside is limited above the covered-call strike.
Let's look at how a covered-call trade on IBIT might take shape.
Buying 100 shares of this bitcoin ETF would cost around $6,240. A July 18, 65-strike call option is trading around $1.05, generating $105 in premium per contract. Selling the call option generates a return of 1.71% in 16 days, equaling around 39% annualized.
If IBIT stock closes above 65 on the expiration date, the shares will be called away at 65, leaving the trader with a total profit of $363 (gain on the shares plus the $105 option premium received).
That equates to a 5.91% return, which is 135% on an annualized basis.
Covered Calls: Risks And Rewards
Of course, the risk with the trade is that the IBIT ETF might drop, which could wipe out any gains made from selling the call.
Covered calls can be an effective strategy for generating income, managing downside risk, and reducing the effective purchase price of a stock.
According to the IBD Stock Checkup, IBIT has a Relative Strength Rating of 94.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a masters in applied finance and investment. He specializes in income trading using options, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
