Covered calls

How to Repair a Deep-in-the-Money Covered Call in Crypto

5 November 2025 | 43 seen

Covered calls are among the most reliable tools for extracting yield in volatile markets. Still, when prices fall sharply, even disciplined positions face pressure. The decision then shifts from profit maximization to risk control and capital efficiency. 

In this article, we’ll walk through practical ways to repair a broken covered call, especially when the underlying asset has crashed and the position is deep in the money.
At Terramatris, we primarily trade crypto options, so the examples focus on assets like Ethereum — but the same principles apply to traditional stock covered calls as well.

1. Rolling Down the Call
When the underlying declines, the short call’s value drops. Buying it back and reselling at a lower strike increases income but sacrifices potential upside if prices recover. It’s a quick income fix, not a long-term solution.

2. Ratio Rolling (Adding Lower Calls)
Selling an additional lower strike call can speed up premium recovery but doubles exposure if the market reverses. It’s a tactic that rewards precision timing and disciplined risk sizing.

3. Closing and Re-Entering via Short Puts
Closing the covered call and pivoting to short puts allows traders to maintain premium flow while resetting exposure lower. It’s often cleaner when volatility remains high and directional conviction is low.

At Terramatris, we operate under a simple principle: Income first, precision later.

We’re comfortable selling aggressive calls below breakeven to maintain premium inflow — but only when risk/reward justifies it. Our breakeven on ETH is roughly $4,250, and we’re currently evaluating selling short-term calls with $3,600–$3,800 strikes while the market stabilizes around $3,200–$3,300.

This approach acknowledges near-term downside risk while extracting yield from elevated implied volatility. If the market recovers and ETH closes above the strike:

• Assignment at $3,600–$3,800 would effectively realize a controlled loss versus our original $4,250 entry.
• From there, we’d re-enter exposure via short puts, likely around $3,000–$3,200, collecting premium while positioning to rebuild ownership at a better cost basis.

This keeps the capital working without forcing early exits or reactive hedges.

When ETH plunged from ~$4,100 to $3,200, our 1 ETH covered call was deep underwater relative to the initial entry. Rather than panic-selling, we analyzed the probability curve:

• At-the-money IV was above 80%, creating strong short premium opportunities.
• Selling 1-week calls around $3,600–$3,700 would yield roughly $38–$56 per contract, translating to a 1–1.5% return on notional for a single week.

That’s sufficient to reduce the effective cost basis toward $4,200 even if price drifts sideways. If assigned, the follow-up short put cycle continues the yield chain without margin strain.

We’ve long maintained that leverage is a double-edged sword. It amplifies gains in quiet markets but can destroy capital during volatility spikes. 

As the Terramatris portfolio grows, our objective is clear:

• Keep leverage lower, ideally under 1.2× net exposure.
• Prioritize liquidity and optionality over absolute yield.
• Let compounded option income grow the portfolio organically, rather than force size with borrowed capital.

Reducing leverage allows us to survive drawdowns intact — which, in option writing, is the real competitive edge.

Covered call “repair” isn’t about recovering every lost dollar — it’s about managing premium flow and risk posture intelligently. At Terramatris, we remain patient. We’re evaluating short calls between $3,500–$3,600, not rushing to sell. If assignment occurs, we’ll pivot to short puts near $3,000–$3,200 to re-establish long exposure with lower basis and continued yield.

In volatile markets, survival and steady premium accumulation matter more than speed.

Selling Covered Calls on Borrowed Bitcoin: Strategic Yield with Asymmetric Risk

25 May 2025 | 53 seen

On May 25, 2025, we executed a position that perfectly illustrates a niche but compelling setup in the crypto derivatives space. We:

• Borrowed 0.01 BTC (worth $1,080 at the time),
• Posted 0.54 ETH as collateral (worth $1,350),
• And sold a cash-settled call option on 0.01 BTC with a strike price of $110,000,
• Collecting a premium of $17 with weekly expiry (May 30).

Let’s break down the rationale, benefits, risks, and variations of this strategy — and why, despite its synthetic nature, it can be a valuable tool in Terramatris' option yield strategies.

The Core Strategy

The basic idea is to monetize a borrowed BTC position by selling a cash-settled call option against it. If BTC stays below the strike at expiry, we pocket the premium. If BTC rises above the strike, we owe the difference in cash, not the actual asset — avoiding delivery risk.

Important nuance: This is not a traditional covered call.
We don’t own the BTC — we’ve borrowed it.
That makes it a synthetic covered call, with an embedded liability to return the BTC.

When This Trade Makes Sense

We like this setup when there's no strong expectation of a significant upside rally, but also no urgency to unwind BTC exposure. Here's why:

• Downside is unaffected: If BTC dumps, we simply repay what we borrowed + interest.
• Upside is capped: We sacrifice potential gains above the strike, but in this scenario, we don’t own BTC anyway, so that upside isn’t truly ours to begin with.
• Premium acts as yield: In flat or mildly bearish markets, we earn incremental yield on BTC exposure we don’t even fund directly.

This structure creates asymmetric optionality: we earn in neutral-to-bearish markets, while having limited pain if BTC rips — provided we manage risk proactively.

When This Trade Can Go Wrong

While selling calls against borrowed BTC can be structurally appealing in range-bound or declining markets, the risk profile changes drastically if BTC rallies hard.

If BTC rises above the strike price (e.g., to $120,000 while our strike is $110,000), the option gets exercised and we owe the difference in cash — $100 in this case. That’s manageable. But:

• We don’t own the BTC — we borrowed it.
• We must return 0.01 BTC, now worth $1,200, not the $1,080 it was at entry.
• Plus, we’re paying interest on the BTC loan during the holding period.

Yes, we can roll the option up and forward, but if the rally is fast or continuous, this becomes expensive and hard to sustain.

Roll-forward: The Tactical Adjustment

If BTC approaches or breaches the strike before expiry, we can roll the call forward:

• Buy back the current option (at a loss)
• Sell a new call at a later expiry — potentially at a higher strike
• Capture more premium and defer obligation

This defers loss realization and potentially recovers it over time — a classic theta farming tactic.

Why It’s Not Truly “Covered”

Let’s be precise: a covered call requires that you own the underlying asset (BTC). In our case:

• We borrow BTC — we don’t control it fully
• The debt remains even after the option expires
• If BTC rallies hard, we face repayment risk at high prices

So while the structure resembles a covered call, it’s closer to a short BTC position with a cash-settled call overlay.

Alternative: Borrowing Stablecoins Instead

One arguably cleaner alternative would be:

1. Borrow USDC or USDT against ETH or BTC
2. Use that to buy BTC outright
3. Sell a true covered call against it

This shifts the exposure from a BTC liability to a stable-coin liability, which:

• Makes P&L easier to track
• Lets us own the BTC
• Still gives us access to yield via covered calls

However, this invites another question:

Why not just use margin accounts from brokers or exchanges?

That’s valid — platforms like Binance or Deribit offer margin functionality that accomplishes similar goals, often with tighter integrations and better liquidity.

The Bigger Picture: Crypto Borrowing and DeFi

The broader insight here is that crypto borrowing is a rich, under-explored domain.

It powers:

• Staking and yield farming
• Liquidity provision in DeFi protocols
• Cross-asset hedging
• Capital-efficient options strategies like ours

As Terramatris continues exploring multi-asset, multi-platform yield generation, crypto collateralized borrowing remains one of the most flexible primitives available.

Final Thought

This approach is worth exploring only when upside explosion seems unlikely and there’s room to roll or unwind gradually. While it might look attractive due to its yield component and downside neutrality, the tail risk in a bullish breakout is real and potentially severe.

We include trades like this in our playbook not because they're “safe,” but because they challenge assumptions, expand strategic thinking, and reflect how crypto’s flexibility can be both a tool and a trap — depending on execution and timing.

How to Sell a Synthetic Covered Call on ETH

21 May 2025 | 176 seen

At TerraMatris Crypto Hedge Fund, we actively deploy a range of options strategies to generate income and manage directional exposure. Today, I want to share an elegant and capital-efficient technique we’re using: the synthetic covered call—a method that replicates the payoff profile of a traditional covered call, without the need to hold the underlying crypto asset.

What Is a Synthetic Covered Call?

Traditionally, a covered call involves owning a crypto asset (like ETH) and selling a call option against it. This generates premium income while capping upside beyond the strike price. But what if you want to benefit from the same structure without committing capital to the spot position?

The solution is to create a synthetic long position using options and then sell a call against it—thus forming a synthetic covered call.

Trade Breakdown: TerraMatris ETH Position (Initiated May 21, 2025)

Here’s how we executed the trade:

• Bought: 1 ATM ETH long call expiring July 25, 2025 — Paid 327 USDT
• Sold: 1 ATM ETH short put with same expiry and strike — Received 253.1 USDT
• Net Debit for Synthetic Long: 327 - 253.1 = 73.9 USDT

This synthetic long position mimics holding 1 ETH. If ETH rises, the value of the long call increases. If ETH drops, we are effectively long through the short put obligation (we’re willing to “buy” ETH at the strike price).

To generate yield, we layered on a short call:

• Sold: 1 weekly ETH call option expiring May 23, 2025, strike 2600 — Collected 31.2 USDT

This short call generates income just like in a traditional covered call. If ETH trades above 2600 by Friday, we’ll roll or adjust the position. If ETH stays below the strike, we keep the premium.

Ongoing Strategy Until July 25

Our plan is to sell a weekly call option every week until the long position expires on July 25, 2025. This rolling strategy aims to capture between 300–400 USDT in total premium over the life of the trade.

Assuming ETH is below 2500 on July 25, we’ll likely get assigned on the short put—effectively buying 1 ETH. At that point, we plan to add a spot ETH long position via perpetual futures, locking in exposure and continuing premium-selling activity.

Break-Even and Risk Profile

The initial synthetic long cost us only 73.9 USDT, while weekly call premiums will potentially offset most of the cost. Factoring in the expected 300–400 USDT in income from short calls, our break-even price on ETH by expiry is projected to be in the $2,100–2,200 range.

• If ETH rallies strongly: Our gains will be capped at the call strike, but the trade is still profitable.
• If ETH drops: We may end up long ETH at an effective cost far below current market prices.

This gives us a high-probability structure to generate yield, manage risk, and opportunistically accumulate ETH.

Conclusion

The synthetic covered call is a powerful tool in our options playbook—especially useful when capital efficiency and yield generation are priorities. It allows us to simulate long exposure and earn premium income without needing to allocate full capital to spot ETH.

At TerraMatris, we continue to explore such strategic derivatives plays to balance income, risk, and long-term crypto accumulation.