Options Tuesday: COIN May Be Down… But It’s Not Out

Shah Gilani|April 27, 2021

Coinbase’s stock came out of the gate hot to trot, but it’s been acting more like a dog than a pony since its debut.

That’s probably because bitcoin’s been in the doghouse.

Which makes sense, not because bitcoin is the only crypto traded at Coinbase, it isn’t. But it is a proxy for the entire cryptocurrency space.

So, you could say, as bitcoin goes, so goes Coinbase.

It isn’t always going to be that way because over time, if the crypto craze continues and many of them become all they’re cracked up to be, trading and investing in them will explode and so will transaction volume on Coinbase. That’s when traders and investors in Coinbase will use all the metrics analysts use to value traditional exchanges.

Of course, that’s “if” cryptos continue to be unobstructed by regulators or governments.

As far as investors looking at Coinbase now, like we are today, the relative measure of how bitcoin’s doing, meaning how it’s trading pricewise, is what matters.

I know it sounds simple, and most of the time simplicity is the smartest way to look at trading opportunities, investors are looking at Coinbase through the prism of bitcoin’s price, simply because if bitcoin’s price starts falling or crashing that might be indicative of investor interest waning, or obstructionists poking a stick in the many spoked wheel of the cryptocurrency space.

On the other hand, if bitcoin starts rocketing higher so will Coinbase’s stock price, because more investors will be attracted to cryptos as headlines tout millionaires being minted day after day, price rise after price rise.

Case in point.

Just this month, bitcoin lost more than 25% of its value between April 14 to April 23.

Investors who established initial bitcoin positions on April 14 probably spent the last two weeks biting their nails and hiding their heads in the sand.

Savvy investors, on the other hand, will probably use the recent sell-off as a bitcoin buying opportunity, as so many have in the past.

What’s important is understanding how often bitcoin’s been hammered and how often it not only rebounded, but it also went on to make much higher highs. It’s bitcoin’s trading pattern.

And hopefully, for bitcoin, and Coinbase, that pattern will continue to be a positive one.

Renewed buying of bitcoin, like we saw yesterday, not only encourages more investors into the space, but bitcoin’s price strength signals strength in the whole crypto space, and of course in Coinbase’s future too.

Now you know why and how the recent pullback in bitcoin held back shares of COIN.

So, it makes perfect sense that a reversal to the upside in bitcoin would pull shares of COIN higher with it.

If you’re a believer in cryptos, especially bitcoin, you could simply buy shares of COIN and let the trade play out or become an investment of the first order.

On the other hand, if you want to specifically target a quick upside move in COIN, because maybe you’re not sure what the long-term future of cryptos and Coinbase really are, but you want to go with what’s working right now, you might consider buying call options on COIN.

I like the COIN May 21, 2021 expiration $305 calls (COIN210521C00305000) as bitcoin starts to recover. But they’re trading around $18.50 (or $1,850) per contract.

That’s expensive, especially for a short-term speculative trade. The options on COIN are expensive because the underlying volatility of Coinbase’s stock, in its short life, is very high.

So, instead of purchasing outright call options on COIN, I like buying a “bull call spread” to bring the cost of the trade down to approximately $2.00, rather than $18.50.

I like the COIN May 21, 201 $305/$310 Bull Call Spread, which means you buy the $305 calls and simultaneously sell the $310 calls expiring on the same day.

That “call spread” is worth $5.00 (or a total of $500 per contract spread), which is the difference between the two strike prices. If you buy the spread for a cost of $2.00 and COIN closes on May 21, 2021 at $310 or higher, you earn the whole $5 spread, minus the $2 cost you paid for the spread. So, you’d make $300 on a $200 investment.

Of course, COIN could close on expiration day below $310. You’d at least break even if COIN closed at $307 on expiration. But if it closed below $305, you’d lose all your investment outlay.

Considering COIN closed Monday’s session up 4.44%, the stock rising another 1.79%% to get ABOVE $310 doesn’t seem like much of a stretch.

That’s how I’d play Coinbase rising on my expectation that bitcoin will lead it higher

You in?

Shah Gilani