Maximizing Profits: Naked Calls vs. Covered Calls

Backtesting what some consider the "riskiest" of strategies

🔥 If you're looking for a way to earn extra income, selling call options can be a powerful strategy. But beware: selling naked calls can be risky. Here's what you need to know:

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💰 Selling call options gives you the ability to earn premium income. But if you sell a naked (unhedged) call, you're taking on unlimited risk since you're obligated to sell the underlying asset at a preferential price if the buyer exercises the option.

🤔 So what's the alternative? You can sell covered calls, which involves selling call options on an asset you already own. In TradFi, this is considered "safer" since:

• Downside is NOT unlimited (but still substantial)

• Markets tend to go up (this is a bullish strategy)

The payoff of selling a covered call is the same as a naked put. (Bonus point: covered call = naked put = Uniswap LP 🤯)

🔍 To figure out which strategy is right for you, it's important to backtest and analyze past data. Let's analyze what periodically *selling* naked ATM ETH calls over the last 2 years might look like!

Panoptic @Panoptic_xyz

2/11 Let's backtest *hypothetical* DeFi call options (wen Panoptic? 😉) 🗓️ Jun '21 - Feb '23 ⚖️ Periodic rebalancing (day, week, or month) Strategy: 1. Buy at-the-money (ATM) call option 2. Exercise/close at end of period 3. Pay LP fees as premia docs.panoptic.xyz/docs/panoptic-…

Anyone will be able to sell options on Panoptic for any asset at any strike. Panoptic options even have an "effective Time To Expiration"👇 This means you can customize your Panoption to sell "dailies", "weeklies", and "monthlies". Let's backtest these 3 strategies!

Panoptic @Panoptic_xyz

7/12 So how do I buy a 0DTE on Panoptic? I thought Panoptions don't expire? That's right! But on Panoptic, you can adjust the "width" (r) of your Panoption to correspond with Time To Expiration (TTE): Wider range → longer TTE More volatility → shorter TTE See math below 🤓👇

Backtest #1: selling (naked) calls on $ETH every week.

• Earned 126% in premia

• Lost 132% from calls being exercised

→ Total PnL: -6%

(Compare to ETH HODL: -32%)

Unfortunately, our strategy wasn't profitable. What if we tried different rebalancing periods?

Backtest #2: selling (naked) calls on $ETH every day/week/month.

• Weeklies: -6%

• Monthlies: -28%

• Dailies: -57%

Wow...dailies & monthlies did even worse. Let's try something typically seen as "less risky" — covered calls!

Backtest #3: naked calls vs. covered calls.

• Naked calls: -6%

• Covered calls: +6%

(The fact that they are exactly opposite is a coincidence.)

Covered calls did better...but why?

Notice how naked calls (blue curve) performed great in May 2022 — during the Terra collapse and bear market!

Fact:

• Bull market → naked calls 👎

• Bear market → naked calls 🚀

Let's test this out on one of the biggest bear markets: the UNI-ETH price!

In the spot markets, UNI has massively underperformed ETH. That makes the UNI-ETH price a bear market. So what happens if you sell naked calls on UNI-ETH? Answer:

• 😎 Dailies: +55%

• 😄 Weeklies: +54%

• 🙂 Monthlies: +38%

Summary:

• Naked calls have unlimited risk

• Naked calls are bearish and do well in 🐻 markets

• Covered calls are bullish and do well in 🐂 markets

Caveats:

• ⛽ Ignores gas/swap fees/commission

• 💲 Assumes premia = LP fees

• ❓ This is hypothetical — you can't sell calls on Uniswap (Panoptic soon 🤫)

Disclaimer:

• 📢 None of this should be taken as financial advice.

• ⚠️ Past performance is no guarantee of future results!