A remarkable surge in the trading of call options for Coinbase (NASDAQ:COIN) set to expire on October 27 has caught the market’s attention. Coinbase is scheduled to release its Q3 earnings report on November 2, with investors allowed to submit questions starting on October 26. The surge in call options trading suggests that investors in COIN are optimistic about the cryptocurrency market’s future.
In recent months, COIN has faced a decline, dropping from $99.77 on July 26 to $78.20, marking a decrease of more than 21.6% over the past three months. However, there is anticipation that COIN could witness a substantial turnaround as investors contemplate a bullish outlook on the crypto market, likely based on guidance from Coinbase management. This could explain the significant volume of call options traded recently.
Massive Call Volume in COIN For instance, analysis from Barchart reveals that over 7,700 call options at the $80 strike price have been traded for the October 27 expiration period, surpassing typical trading levels by more than threefold. Moreover, the midpoint premium stands at $1.78, suggesting that buyers of these out-of-the-money (OTM) calls are betting that COIN’s stock will exceed $81.78 per share by the close of trading on Friday. In other words, they are hoping for a 4.57% increase from the current price ($81.78/$78.20 – 1).
What’s Fueling This Bullish Sentiment? This bullish sentiment may stem from the recent performance of cryptocurrencies, particularly Bitcoin. Bitcoin has surged from $25,162 on September 11 to nearly $31,000 as of mid-morning on October 23, representing a substantial gain of over 23% in just over a month. This strong performance could be a key factor driving investors’ optimism about COIN’s future.
Investors might also assume that Coinbase witnessed a surge in crypto trading activity in the latter part of Q3 and throughout October, potentially boosting the company’s revenue, which analysts, as surveyed by Seeking Alpha, have forecasted to exceed $655 million.
Additionally, the stock might be benefiting from a turnaround resulting from what was previously perceived as excessive pessimism. Investors seem to be capitalizing on this shift in sentiment, and that’s why purchasers of COIN call options are optimistic about further price increases.
Taking Advantage of High Premiums by Shorting OTM Puts An alternative approach to capitalize on this trend is to sell short out-of-the-money put options with near-term expirations. These put options currently command high premiums.
For example, the $73.00 strike price, which is 6.57% below the current stock price of $78.20, is selling for $4.05 in the November 10 expiration period. This premium equates to a substantial 5.54% put yield since the $4.05 premium received for selling these puts short represents 5.54% of the $73.00 strike price.
Furthermore, investors who short these puts are protected until the stock reaches $68.95 per share ($73.00 – $4.05) before they would be obligated to purchase the stock. This equates to an 11.8% downside protection or breakeven point (i.e., $68.95/$78.20 – 1).
In practical terms, investors must initially set aside $7,300 in cash or margin for each put contract they wish to short. If, for instance, they opt to short three put contracts, they must allocate $21,900 in new cash or available margin with their brokerage.
Following this, they can proceed to “Sell to Open” three put contracts at the $73.00 strike for the November 10 expiration. This action will result in an immediate receipt of $1,215 (i.e., 3 x $4.05 x 100). This translates to an immediate yield of 5.547% based on the $21,900 investment.
If this contract expires worthless in 18 days, and the trade can be repeated every three weeks for a year (i.e., 17 times), the annualized expected (ER) yield would be $20,655. Given the $21,900 invested each time, this ER amounts to 94.3%, representing a remarkable potential upside.
It’s important to note that the short-put yield will fluctuate each time this strategy is executed. Nonetheless, this strategy illustrates an alternative approach to capitalize on the current high yields in the near-term options market for COIN stock.
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