Here's how to properly earn a DeFi sized yield trading Bitcoin options

I recently caught wind of an interesting Cointelegraph article explaining how investors could earn 41% APY on their Bitcoin without converting it to renBTC or WBTC.In the article, the writer laid out a detailed case for generating yield on Bitcoin holdings by investing in options markets instead of decentralized finance apps.

How Do Covered Calls Work?In the article, the author describes a covered call strategy as consisting of "Simultaneously holding BTC and selling the equivalent size in call options."

As shown above, the most lucrative covered call strategies will be the ones that have contract lengths greater than a year, strike prices equal to today's price, and are created when BTC volatility is highest.

An easy way to visualize the exposure you get when trading options is to look at profit and loss on your position versus where the BTC price ends up on the day the contract expires.

A covered call is a position made by going long an asset and short a call option on that asset, so the combined profit and loss looks something like the below.

"As previously mentioned, the covered call might present losses if the BTC price at expiry is lower than the strategy threshold level.Any level below $8,960 will result in a loss, but that is 16.6% below the current $10,750 Bitcoin price."

If an investor sells a call option with a strike price lower than today's price, they must be ready to sell your asset at that lower strike price.

Put another way, if one holds 1 BTC today, when the price is $10,750, and then sells a call against it at a $9,000 expiry today, the lucky person on the other side gets to make a free $1,750 when they buy the BTC from the investor at $9,000.

"A 25% APY return can be achieved by selling 0.5 BTC $8K and 0.5 BTC $9K November call options. By reducing expected returns, one will only face negative outcomes below $8,370 at the November 27 expiry, 22% below the current spot price."

The major benefit of trading covered calls monthly is that investors reset their strike price every month.