How do Covered Calls work?
by Friktion Research Collaborators
With the launch of Volt #01 on Mainnet — Marco, Leonardo, and Amontons have put together this guide to how the first strategy in Volt#01 works!
Start earning: app.friktion.fi/income
What is a covered call and what makes it a good income strategy?
A covered call strategy involves generating passive yield from selling (writing) call options on an asset that you own (eg. SOL). In exchange for earning the premium from the option buyer, the seller gives away the right to purchase the asset at the agreed upon strike price. It’s important to remember that this strategy doesn’t utilize any leverage or token emissions, since all the options are fully collateralized by the sellers holdings!
Let’s jump into an example:
Say SOL is currently $200 and you deposited 1 SOL into Volt #01’s covered strategy which is writing a call option at a strike price of $220 expiring in 1 week, collecting a $10 (0.05 SOL or 5%) premium.
Note: Friktion v1 is built with physically settled options meaning you receive yields in SOL, not USDC.
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?
- Enhance income with volatility: As volatility rises, so does the premiums and yields which can be generated on call overwriting strategies.
- 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
- Earn yields that aren’t reliant on token emission programs or vary based on borrowing demand and liquidation management
- Efficient execution through on-chain orderbooks and competitive market maker auctions.
Start earning @ app.friktion.fi/income
Still have questions? Find us in Discord!