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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:
💰 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!


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!



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!