The crypto market is famously volatile. For beginners looking to earn additional yield while holding their tokens, the covered call strategy is a great starting point. [1]In fact, early 2024 saw Grayscale file for a Bitcoin Covered Call ETF. This signals growing mainstream interest in this approach, where investors hold spot crypto while selling call options to earn premium income. A covered call involves holding a certain amount of a crypto asset and simultaneously selling call options of the same asset. This setup allows the seller to generate income from the premiums received. In the sections below, we’ll walk through how the strategy works, when it’s most effective, its key advantages and risks, and which trading platforms currently support it.

Covered Call Strategy Explained: Holding Tokens and Selling Call Options

The Covered Call strategy is relatively straightforward and consists of two main steps: holding crypto assets and selling call options. Here’s a breakdown of how it works:

1. Hold the Spot Asset: First, the investor must hold a certain amount of a crypto asset, for example, 1 BTC. This asset serves as the collateral backing the option. In case the buyer chooses to exercise the option, the seller is “covered” and able to deliver the required tokens. That’s where the name “covered call” comes from.

2. Sell Call Options: Next, the investor sells call option contracts for the same amount of the asset they’re holding. A call option gives the buyer the right (but not the obligation) to purchase the asset at a predetermined strike price by a certain expiration date. In return, the seller receives a premium as compensation. Since the seller holds an equivalent amount of the asset, this is considered a low-risk alternative to naked call selling.

3. Wait for Expiration and Settlement: At expiry, there are two possible outcomes: \
   If the spot price is below the strike price, the option expires worthless. The seller keeps the underlying asset and the premium as pure profit. If the spot price exceeds the strike price, the buyer will likely exercise the option. The seller must sell the asset at the agreed strike price, which caps their upside. However, they still keep the premium received. In this case, the investor secures income but misses out on gains above the strike level.

Explanation of the Covered Call Strategy (Source: Gate Learn Creator John)

Let’s walk through a simple example to understand this strategy better:

Suppose you own 1 ETH that is currently traded at $2,000. You believe the price won’t exceed $2,500 within the next month, so you sell a one-month call option with a $2,500 strike price. In return, you receive a premium worth $100. Here’s how things could play out:

1. ETH stays below $2,500: If ETH ends up at $2,400 (< strike price) on expiry, the buyer won’t exercise the option. You keep your 1 ETH and pocket the $100 premium, effectively earning 5% on your holding in a month. This is a form of passive income for simply holding ETH.
2. ETH rises above $2,500: If ETH rallies to $2,800, the buyer exercises the option. You’re required to sell your 1 ETH at $2,500, even though the market price is higher. You receive $2,500 (strike price) + $100 (premium), totaling $2,600. Compared to holding and selling at $2,800, you’ve missed out on $200 in potential upside. In other words, you’ve capped your profit.

Example: Covered Call in Practice (Source: Gate Learn Creator John)

This example shows how covered calls can generate steady income from premiums, while also highlighting the trade-off: you give up some upside if the market rallies significantly. Next, we’ll discuss the market conditions in which this strategy is most effective, along with its potential advantages and disadvantages.

Suitable Market Conditions: Sideways or Gradually Rising Trends

The covered call strategy isn’t advantageous in all market scenarios; it’s most effective in sideways or moderately bullish environments. If you anticipate limited price appreciation or range-bound movement, selling call options to earn premiums can be a prudent choice. Below are two ideal situations for employing this strategy:

Sideways Market

In a market where prices fluctuate within a certain range without a clear upward or downward trend, holding the asset alone may not yield significant returns. By selling call options, you can generate additional income through premiums. As long as the price remains below the strike price, you retain your cryptocurrency holdings and continue to collect premiums. Even if the market experiences slight declines, the premium income can partially offset potential losses.

Gradually Rising Trends

During the early stages of a bull market or in a modest uptrend, if you believe the asset’s price will increase slightly in the short term without a significant surge, a covered call strategy can be beneficial. You might sell call options with strike prices slightly above the current market price. If the market rises moderately (without reaching the strike price), you benefit from both the asset’s appreciation and the premium income. Even if the price slightly exceeds the strike price, you’re obligated to sell the asset at that price. As a result, you secure anticipated profits without missing out significantly. This strategy is particularly suitable when expecting minor gains or stable prices, as it enhances portfolio returns and reduces holding costs through premium income.

Conversely, if you anticipate substantial market movements—either upward or downward—a covered call may not be appropriate. A sharp price increase could result in missed opportunities for higher profits, while a significant decline could devalue your holdings, with premium income insufficient to cover losses. In such extreme scenarios, alternative strategies (like holding the asset for potential surges or using options to hedge against declines) might be more advantageous. Therefore, beginners should assess whether their market outlook aligns with the assumptions of a sideways or gradually rising trend before implementing a covered call strategy.

Comparison with Other Common Option Strategies

Here’s a comparison of the covered call strategy with other prevalent option strategies:

Compared to other strategies, the covered call is relatively straightforward and considered a low-risk approach. In the worst-case scenario, the seller is obligated to sell the held asset at the strike price. This avoids margin calls or unlimited losses. Additionally, by selecting out-of-the-money options (with strike prices above the current market price), there’s a higher chance the options will expire worthless. It allows the seller to retain the premium income, effectively “renting out” the cryptocurrency holdings. These characteristics make the strategy appealing to traditional investors and often recommended for beginners. For long-term holders, repeatedly executing covered calls can accumulate significant premium income, which reduces the cost basis of their holdings.

It’s important to note that covered calls don’t fully protect against declines in the underlying asset’s value. If the market drops significantly, the depreciation in your cryptocurrency holdings may not be entirely offset by the premium income. Therefore, this strategy is most effective in neutral to mildly bullish scenarios and still carries potential losses in sharp downturns. Beginners should not view premium income as foolproof insurance, as it merely enhances returns while slightly mitigating downside risk.

When employing a covered call strategy, investors should also be prepared for the possibility that their assets may be sold. If the option is exercised, your cryptocurrency will be sold at the strike price (or settled in equivalent value by the exchange, depending on the contract)， thus reducing your holdings. This is particularly important to consider if your investment plan involves long-term holding without selling. However, investors can choose to close or roll over the position before expiration (by buying back the sold option or extending the expiration date) to avoid actual delivery. This involves advanced techniques, additional costs, and experience, and is not recommended for beginners.

In summary, the core trade-off of the covered call strategy lies in balancing immediate income against potential future gains: by earning premium income, you inherently cap some of the profits in extreme market movements. Understanding this balance enables investors to apply the strategy effectively without deviating from their investment objectives.

Platforms Supporting the Covered Call Strategy

Today, numerous tools and platforms facilitate the implementation of the covered call strategy for investors. We’ll explore some representative platforms to illustrate how they support the execution of this strategy.

Ribbon Finance — Automated Covered Call Strategy

Ribbon Finance is a decentralized finance (DeFi) protocol on Ethereum that offers various structured investment products. One of its most popular products is the Theta Vault, which automatically executes covered call strategies to help users earn income from their crypto assets. Users simply deposit assets, such as ETH or BTC, into Ribbon’s vault contracts, and the platform will sell out-of-the-money (OTM) call options weekly. This helps earn premiums and automatically reinvests the returns. This automated mechanism enables even beginners, who may be unfamiliar with options, to participate in covered call strategies and earn premiums. Ribbon’s smart contracts have been audited by multiple parties and have attracted significant capital. This demonstrates the popularity of such strategies from 2023 to 2025.

In Ribbon’s Theta Vault strategy, the strike price is typically set at a certain percentage above the current market price each week, which reduces the chances of the call option being exercised. If the option expires out-of-the-money, the premiums collected are automatically reinvested into the Vault, thus compounding the user’s holdings. If the option is exercised (i.e., the price hits the strike), the Vault sells a portion of the underlying asset as per the strategy, thus fulfilling its obligation. For depositors, this may lead to a slight reduction in token holdings, but it’s offset by receiving equivalent fiat value and premium income. It’s also important to note that Ribbon charges both management and performance fees, and there are inherent smart contract risks involved. That said, Ribbon Finance significantly lowers the technical barrier for individuals to participate in covered call strategies. It offers a hands-off, time-efficient way to earn yield through option premiums.

Ribbon Finance offers automated execution of the Covered Call strategy (Source: Gate Learn Creator John)

Deribit — The World’s Largest Crypto Options Exchange

Deribit is known for offering options trading on mainstream cryptocurrencies like Bitcoin and Ethereum, accounting for about 70% of the global crypto options market. Users can open an account on Deribit and use assets such as BTC or ETH as collateral. Through an intuitive trading interface, they can fully execute the covered call strategy: select option expiration dates and strike prices, place orders to sell call options, and automatically hedge with their spot positions.

Compared to other centralized exchanges, Deribit stands out for its high liquidity, deep order books, and relatively low option fees. It also features a Block RFQ (Request for Quote) system tailored for institutional traders, which enables them to privately request quotes from multiple market makers without exposing large orders to the public book. For instance, an institution looking to execute a large block trade, such as 50 BTC call options, can initiate an RFQ for a single-leg or multi-leg strategy. Within seconds, they receive competitive quotes from multiple market makers and can transact at the best available prices. This significantly improves price discovery and minimises slippage. Market makers can respond with either All-or-None (full execution) or Any-Part (partial fill) options. This guarantees that institutional clients’ complex needs are met efficiently, with low transaction costs and fast execution.

Deribit also offers greater flexibility in strike prices. It allows traders to choose or customize strike prices that align more closely with their strategic objectives. This enhances capital efficiency and risk management. The platform’s dynamic strike price strategy adjusts intervals based on underlying price movements, volatility, and user demand, thus ensuring continued depth and liquidity in the options chain. For standard monthly and quarterly contracts, the BTC strike price is set at $1,000 intervals, and ETH at $50. However, for short-term options like ‘daily options’ expiring in two days, strike prices are listed in finer increments of $125 (BTC) or $5 (ETH), within a ±5% range of the spot price, which facilitates precise hedging or short-term speculation. If the underlying price breaks through the existing outer or inner strikes, the system automatically adds new strike prices to enhance flexibility. Additionally, Deribit sets the buyer’s Delta coverage range between 0.1 to 0.9 (and –0.1 to –0.9 for the seller). This ensures that traders can find ideal strike prices for positioning and risk management across various market scenarios.

Gate.io — Manually Executing Covered Call Strategy

Gate.io also allows investors to manually execute a covered call strategy. By depositing BTC, ETH, or other assets as collateral, users can sell call options, thereby implementing the covered call strategy. As long as there are enough spot or margin holdings in the account, the platform will link the position to the sold options contract. This ensures that the call is fully “covered” rather than an uncovered call. As of 2025, the range of options available on Gate.io has expanded from BTC and ETH to include various crypto assets such as SOL, ADA, DOGE, and LTC, catering to investors’ diverse strategic needs.

Compared to automated solutions like Ribbon, manually executing the covered call strategy on Gate.io requires more knowledge and experience. However, this approach offers greater flexibility and the potential to capture enhanced returns for advanced users who wish to control each parameter.

For example, users can use volatility tools, such as Amberdata Volatility Cones API or CME QuikVol Tool, to calculate historical volatility over 30, 90, and 180 days and compare it with the current implied volatility (IV). This allows users to intuitively assess whether current volatility is high or low and adjust their strike prices accordingly. For instance, if IV is between 50% and 75%, they might choose a strike price around 10% above the current market price. If IV exceeds 75%, they may opt for a strike price 1.5 times the current price, thus earning higher premiums. By combining this with an options delta range (0.1 to 0.9), users can create an automated, data-driven strike price selection mechanism: higher volatility leads to higher strike prices and more premium income, while the strike price can be adjusted after volatility decreases to balance potential gains and risk management.

Gate.io Options Trading (Source: Gate.io)

Conclusion

The covered call strategy offers crypto investors a structured way to generate yield on idle spot holdings by collecting option premiums. In the evolving landscape of 2025, as crypto derivatives mature and infrastructure improves, this once-traditional finance strategy has been successfully adapted for digital assets and is now readily accessible to retail users via both decentralized protocols and dedicated options exchanges. For beginners, the appeal lies in its relatively straightforward mechanics and defined risk profile. However, it’s important to note that the income potential comes at the cost of limiting upside participation. As such, investors are encouraged to thoroughly understand option contract terms, start with modest position sizes, and choose reputable platforms for execution. When deployed thoughtfully, covered calls can serve as a consistent cash flow enhancement tool for token holders, particularly in sideways or moderately bullish markets. As such, it becomes a valuable component of a broader crypto asset management strategy.