Bitcoin’s Surge Boosts Coinbase as Investors Eye Options Strategies

The road to all-time highs for Bitcoin investors has been challenging. However, the largest cryptocurrency by market capitalization has shown impressive growth since hitting a low in early April. Bitcoin is hovering near the $100,000 mark and appears ready to retest last year’s highs.

Several stocks are also gaining momentum alongside Bitcoin’s rise, with Coinbase (COIN) emerging as a significant player. As the largest U.S. cryptocurrency exchange, Coinbase provides essential financial services in the crypto economy. This includes a brokerage platform offering liquidity to institutional and retail investors, as well as products for developers to build on-chain.

Earlier this month, Coinbase made headlines by acquiring Dubai-based Deribit, a major cryptocurrency exchange, for $2.9 billion. This acquisition marks the largest deal in the crypto sector to date and strengthens Coinbase’s position as an international leader in crypto derivatives.

Currently holding a Zacks Rank #3 (Hold), COIN has surpassed the earnings expectations in the past nine quarters. Last week, Coinbase posted first-quarter earnings of $1.94 per share, exceeding the Zacks Consensus Estimate by 4.9%. The company has achieved an average earnings surprise of 32.7% over the last four quarters.

In addition to these positive earnings, Coinbase is benefiting from investments in infrastructure and developing partnerships, such as with Stripe. Notably, the company is set to be added to the S&P 500 later this month.

For investors looking to capitalize on this bullish trend in COIN shares, options trading offers a flexible approach, adaptable to current market conditions.

Options Strategies in a Bull Market

Option spreads are particularly effective in volatile markets. A common strategy involves call option debit spreads, where investors purchase a call option while simultaneously selling a related call option at a higher strike price. This approach limits risk, as the sold option is ‘covered’ by the bought option.

Implemented correctly, trading options can yield significant profits with minimized risk, making them a versatile investment tool.

Understanding Option Fundamentals

Before delving into today’s recommended trade, it’s essential to understand some fundamentals of options. Complex strategies often fail to deliver consistent results over time.

Options are standardized contracts that grant the holder the right—without the obligation—to buy or sell the underlying stock at a predetermined price, known as the strike price. A call option grants the right to buy, while a put option grants the right to sell. The buyer of the option is referred to as the option buyer, whereas the seller is known as the writer.

These contracts have specific expiration dates, which can range from weekly to monthly options, and even long-term LEAPS that expire in more than a year.

Options possess time value and intrinsic value. In-the-money options carry both, while at-the-money and out-of-the-money options have only time value. As options near expiration, they lose all time value.

Evaluating Call Option Spread Strategies

Currently, Coinbase fits our criteria for establishing a bullish call option spread. As of this writing, COIN is trading at $266.58 per share. This strategy involves purchasing a June 220-strike call at 51.9 points and selling a June 240-strike call at 37 points, resulting in a total cost of 14.9 points. Considering that each option contract represents 100 shares, the total investment for this spread amounts to $1,490.

The table below outlines potential performance for COIN stock based on various percentage changes at expiration. The last row indicates our expected percentage return from the debit spread trade, revealing that even if COIN declines by 10% or remains flat, our option spread trade can still yield a return of approximately 34%.

Image Source: Zacks Investment Research

Benefits of Spread Trading

1) Downside Protection

The sale of a call option credits cash to the investor’s brokerage account. This reduces the purchase cost of the option and provides downside protection if the price of the underlying stock falls.

2) Reduced Risk

In the aforementioned COIN trade, selling the 240-strike call decreases the risk of the 220-strike purchase from $5,190 to just $1,490 per contract.

3) Stability During Volatility

The downside protection from the call option sale allows investors to maintain their spread trade amid market fluctuations. Without this protection, naked option purchases may compel early selling to mitigate losses.

4) Profit Potential Regardless of Stock Movement

Option spreads can be profitable even if the underlying stock declines or remains flat, thus providing diverse earning opportunities.

Conclusion

A call option spread strategy is an effective method for profiting during volatile market conditions. Notably, the call option sold in this strategy benefits as the underlying stock price declines, acting as a buffer during downturns.

Option spreads leverage inherent advantages of options trading while keeping the risk confined to the price paid for the spread. Volatile markets need not be daunting; they can also represent substantial profit opportunities.

Disclosure: The Zacks Headline Trader service currently holds a position in Coinbase.

Market Insights

With robust earnings growth and an expanding client base, Coinbase is well-positioned to capitalize on rising demands in sectors like Artificial Intelligence and the Internet of Things.

Global semiconductor manufacturing is expected to surge from $452 billion in 2021 to $803 billion by 2028.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.