How do Covered Calls work?

What is a covered call and what makes it a good income strategy?

Let’s jump into an example:

Scenario 1: SOL price hasn’t changed by expiry, still at $200

  • PnL = $10/$200 + ($200 — $200) = + 0.05 SOL
  • You earned +5% (+0.05 SOL)

Scenario 2: SOL price falls to $150 at expiry

  • The call option expires worthless and you collect 0.05 SOL from selling the option
  • PnL = $10/$150 + ($200 — $200) = + 0.07 SOL
  • You earned +7% (+0.07 SOL)!

Scenario 3: SOL price at expiry is above the strike, say $235

  • Deliver 1 SOL for $220 (strike price), now equivalent to 0.94 SOL
  • Collect 0.05 SOL from selling the option
  • PnL = $10/$235 — ($235 — $220)/$235 = -0.02 SOL
  • You lost -2% (-0.02 SOL) but the value of your SOL went up +18%!

Why use Friktion’s covered call strategy to generate income?

  1. Enhance income with volatility: As volatility rises, so does the premiums and yields which can be generated on call overwriting strategies.
  2. Active management: Friktion’s customized solution offers automated strike and expiry selection, position sizing, and target risk-rewards so you are able to set-and-forget across Epochs
  3. Earn yields that aren’t reliant on token emission programs or vary based on borrowing demand and liquidation management
  4. Efficient execution through on-chain orderbooks and competitive market maker auctions.

Start earning @ app.friktion.fi/income

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Friktion brings high quality portfolio construction and dynamic risk management to DeFi.

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Friktion

Friktion

Friktion brings high quality portfolio construction and dynamic risk management to DeFi.

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