CMFDH II — Expressing the Portfolio in Options

1. Background and objective

CMFDH II holds spot Bitcoin, sells covered call options against a portion of that position, and maintains a standing short position in the current-quarter Bitcoin future against one half of the book. The short future is the fund's structural downside protection: in a decline, gains on the short future offset losses on half the spot position, dollar for dollar, at every price level. This protection is paid for in strong rallies, where the hedged half does not participate above the hedge entry. The asymmetry is deliberate and is the core of the strategy.

This note addresses a mandate preference for the portfolio to be expressed with at least half of its instruments in options rather than futures. Each component of the fund can in fact be rebuilt in option form. What follows sets out how, what each version costs, and which combination we would actually recommend.

2. Live market snapshot

The 4.2% annualized basis is the single most important number in this note. It is earned when the fund is short the forward and paid when the fund is long the forward. Every structure below is ultimately judged on which side of that carry it places us.

3. The two halves of the portfolio

Any discussion of "expressing the fund in options" has to separate two distinct positions, because they require opposite structures:

• The hedge leg — currently a short future. Requires a delta of −1. Addressed by Structures A and B.
• The spot leg — currently spot Bitcoin with a covered call written against it. Carries a delta of +1. Addressed by Structure C.

Confusing the two is the most common error in this exercise. An in-the-money call and an in-the-money put do not both point the same way, and neither is a substitute for the other.

4. Structure A — Synthetic short future (hedge leg, recommended)

Selling a call and buying a put at the same strike and expiry produces a position identical to a short future at that strike:

Executed near the money — for example the September 65,000 line — the combined position carries a delta of exactly −1.00 at every underlying price, from entry through to expiry.

5. Structure B — Deep in-the-money call sale (hedge leg)

Selling a single deep in-the-money call — strike well below the market — creates a position whose delta approaches −1 and whose large premium, added to the strike, locks in an effective forward sale price:

The additional yield is not incidental, and it is not free:

6. Structure C — Deep in-the-money put sale (spot leg)

Selling a put struck well above the market is often proposed as a high-delta, high-premium alternative. It is a legitimate structure, but it belongs to the other half of the portfolio. By parity:

With K above the market, that embedded short call is out of the money — which makes the position synthetically identical to holding Bitcoin and writing a covered call against it. It reproduces the fund's spot leg in a single option, with a delta of +1, not −1. It is not a hedge and cannot replace one.

Verification on live prices: the Sep 75,000 put marks 0.17280 ₿. With the September future at $64,516, parity implies a 75,000 call of 0.17280 − 0.16250 = 0.01030 ₿, which matches the observed market. The relationship holds to a rounding error.

The liquidity finding is favourable. Deep in-the-money puts show open interest of 2,967 contracts against 30 to 84 on the deep in-the-money calls, with roughly $649,000 traded on the 75,000 line today. This is the side of the board where institutional yield programmes operate. If a single-leg structure is wanted, this is the one that fills at size.

7. Combinations that do not work

Two pairings are worth ruling out explicitly, because they look balanced and are not.

Long ITM put + short ITM call. If the put is struck above the market and the call below it, the deltas do not offset — they compound. A long in-the-money put is delta −1; a short in-the-money call is also delta −1. The combined position is delta −2 between the strikes and −1 outside them: a double-geared short with a kink, not a hedge. Reversing it (long ITM call + short ITM put) gives delta +2, a leveraged long.

For the two legs to offset rather than compound, they must straddle the market: the same strike, or a put above with a call above it. That is Structure A.

Structure A combined with Structure C. A synthetic short and a synthetic long on the same book cancel to approximately nothing while paying two sets of spreads and fees. They are not additive components; they are opposites.

8. Side-by-side comparison

9. Recommended configuration

If the mandate language is literally that half the portfolio must consist of options — as opposed to requiring that no futures be used — that distinction should be settled before any structure is chosen, because the recommended configuration already satisfies the second reading in full and at no cost.

Structures B and C remain available if the client's preference is specific and informed. In both cases the write-up above should form part of that conversation, so that what is being given up is understood at the outset rather than discovered later.

10. Notes and disclaimer

Prices are live Deribit quotations captured 29 July 2026 and change continuously; annualized figures are arithmetic extrapolations of 58-day values. Delta figures are model estimates at quoted implied volatilities. Deribit options are inverse (Bitcoin-settled) instruments; premiums are quoted and paid in Bitcoin, and USD equivalents shown are conversions at the prevailing index. This document is for discussion purposes only. It is not an offer to sell or a solicitation of an offer to buy any security or fund interest; any such offer is made only through the fund's offering documents. Digital assets are volatile and an investment in the fund may lose value. Nicholas Levenstein & Company · levenstein.net/contact