What are your options - Trading strategies for Coinbase post-Bitcoin spot ETF approval

Important note: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.

• Bullish strategy

  • Short/Credit Put Vertical Spread
      

• Neutral / range bound strategy

  • Short Iron Condor
     

• Bearish strategy

  • Short/Credit Call Vertical Spread

Bullish Strategy

Bullish trading setup on Coinbase

The above screenshot illustrates a vertical put spread, also known as a bull put spread, which is an options strategy that involves selling a put option and buying another put with the same expiration date but a lower strike price. Here's the breakdown:

• Sell to Open: 1 Put with a Strike Price of $120, Expiry 16-Feb-2024
• Buy to Open: 1 Put with a Strike Price of $115, Expiry 16-Feb-2024

This setup results in receiving a net credit (premium) of $125.00 USD, as indicated by the details in the screenshot.

Financial implications:

• Maximum Risk (Max Loss): The maximum risk on this trade is $375.00. This occurs if the price of Coinbase (COIN) falls below $115 by expiration, as both put options would be in the money, with the loss being the difference in strike prices minus the premium received.
• Maximum Profit (Max Gain): The maximum profit is limited to the initial credit received, which is $125.00. This maximum profit is realized if Coinbase stays above the higher strike price of $120 by expiration, allowing both puts to expire worthless.
• Break-even Point: The break-even point for this trade is $118.75, calculated by subtracting the premium received from the higher strike price ($120 - $1.25).

Market analysis:

• Premium: The premium received is relatively high due to the implied volatility (IV) rank being at 29.25%, suggesting that options prices may be inflated compared to the historical volatility of the stock.
• Stock performance: With the recent 5% dip in Coinbase's price following the Bitcoin ETF announcement, this trade assumes that the price will not fall significantly further and will stay above the break-even point by expiration.
• Volatility: A decreasing IV rank indicates that market expectations of volatility are lowering, which can be favorable for this credit spread as the value of the options sold could decrease faster than the ones bought.

Strategic summary: This bullish setup on Coinbase indicates a belief that the stock will not drop significantly further and that the recent dip may be a buying opportunity. It capitalizes on the current elevated options premiums due to the implied volatility. The trader is obligated to buy Coinbase stock at $120 if the price drops below this level but has hedged this obligation by acquiring the right to sell shares at $115. The net credit enhances the trader's position as long as the share price remains above $118.75.

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Neutral / Range Bound Strategy

Neutral Trading Setup on Coinbase: Iron Condor

The strategy depicted is an iron condor, which is an options strategy involving four different contracts:

• Sell to Open: 1 Call with a Strike Price of $180, Expiry 16-Feb-2024
• Buy to Open: 1 Call with a Strike Price of $200, Expiry 16-Feb-2024 (Protective call to cap the risk on the upside)
• Sell to Open: 1 Put with a Strike Price of $120, Expiry 16-Feb-2024
• Buy to Open: 1 Put with a Strike Price of $100, Expiry 16-Feb-2024 (Protective put to cap the risk on the downside)

Financial implications:

• Maximum risk (max loss): The maximum risk for this trade is substantial at $1,450.00, calculated as the difference between the strikes of the puts or calls (whichever is wider) minus the net credit received, times the number of contracts.
• Maximum profit (max gain): The maximum profit is the premium collected, which is $550.00. This maximum profit is achieved if the price of Coinbase stays between the sold strike prices ($120 and $180) by expiration.
• Break-even points: There are two break-even points for this trade. The upper break-even point is at $185.50, calculated by adding the net credit to the sold call strike price. The lower break-even point is at $114.50, calculated by subtracting the net credit from the sold put strike price.

Market analysis:

• Premium: The relatively high premium reflects the strategy’s exposure and the current market volatility, as indicated by the IV Rank.
• Stock performance: The price of Coinbase has recently dipped, and the iron condor strategy suggests the belief that the stock will stabilize and trade within a certain range. This is a typical neutral strategy where significant movements in either direction are not expected.
• Volatility: A neutral strategy like an iron condor benefits from decreasing implied volatility because it relies on time decay to erode the value of the options. This is consistent with the current declining IV Rank.

Strategic summary: The iron condor setup on Coinbase is a neutral strategy that anticipates the stock to trade within a specific range until expiration. It takes advantage of the time decay of options and the current premium levels to potentially generate income. The trader is looking to benefit from the passage of time rather than a directional move in the stock price. This strategy has defined risk and reward parameters and requires the stock to stay between the break-even points for maximum profitability.

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Bearish Strategy

Bearish Trading Setup on Coinbase: Bear Call Spread

This bear call spread is composed of the following options:

• Sell to Open: 1 Call with a Strike Price of $165, Expiry 16-Feb-2024
• Buy to Open: 1 Call with a Strike Price of $170, Expiry 16-Feb-2024

This setup results in a net credit (premium) of $105.00 USD.

Financial implications:

• Maximum risk (max loss): The maximum risk is $395.00, which is the difference between the strike prices ($5) minus the credit received ($1.05) times 100 (since each option contract typically represents 100 shares).
• Maximum profit (max gain): The maximum profit is the credit received, which is $105.00. This will be realized if Coinbase stays below the lower strike price of $165 by expiration.
• Break-even point: The break-even for this trade is $166.05, which is the lower strike price plus the credit received ($165 + $1.05).

Market analysis:

• Premium: The credit received is a reflection of the current option premiums, influenced by the implied volatility in the market.
• Stock performance: Coinbase's stock has seen a decline, and this bear call spread anticipates that the stock will not recover past the $165 mark by the expiration date.
• Volatility: The trade is designed to benefit from a decrease in the stock's price, and with the IV Rank indicating a moderately high level of volatility, the premium received is decent for the risk undertaken.

Strategic summary: This bear call spread indicates a belief that Coinbase's stock will experience a bearish trend or at least not rise above the break-even point of $166.05 by the expiration date. The trader employing this strategy anticipates that the recent developments, despite the bullish news of Bitcoin spot ETFs, will not translate into an immediate positive price movement for Coinbase. The trader receives an upfront premium and will retain the full amount if the stock price remains below $165.

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