Coinbase (COIN) was a strong performer yesterday rising 8.57% for the day and breaking back above the 21-day moving average.
Coinbase is a leading player in the U.S. crypto market with nearly 10 million active
Rather than just buying the stock, savvy traders can use the options market to find smart ways to trade Coinbase stock without risking too much capital.
Today, we’re going to look at a couple of bull call spread trades on Coinbase stock.
Here are the parameters for finding some bull call spread trade ideas on COIN.
- Symbol equals COIN
- Break Even Probability above 40%
- Moneyness -10% to 0%
- Days to expiration 30 to 150
Here are the results of that particular screener:
Let’s analyze some of these ideas.
Bull Call Spread 1: May 23rd $190 – $195 Bull Call Spread
As a reminder, A bull call spread is a bullish defined risk option strategy. To execute a bull call spread an investor would buy a call option and then sell a further out-of-the-money call.
Let’s use the first line item as an example. This bull call spread trade involves buying the May 23rd expiry $190 strike call and selling the $195 strike call.
Buying this spread costs around $3.50 or $350 per contract. That is also the maximum possible loss on the trade. The maximum potential gain can be calculated by taking the spread width, less the premium paid and multiplying by 100. That give us:
5 – 3.50 x 100 = $150.
If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 42.86%.
The probability of profit is 46.7%, although this is just an estimate and does not indicate the probability of achieving the maximum profit.
The spread will achieve the maximum profit if COIN closes above $195 on May 23. The maximum loss will occur if COIN closes below $19 on May 23, which would see the trader lose the $350 premium on the trade.
The breakeven point for the Bull Call Spread is $193.50 which is calculated as $190 plus the $3.50 option premium per contract.
Bull Call Spread 2: July $190 – $195 Bull call Spread
The next example is on the seventh line and involves buying the $190 July 18 call and selling the $195 call.
Going out to July gives the trade more time to work out and is also slightly cheaper.
Buying this spread costs around $3.30 or $330 per contract. That is also the maximum possible loss on the trade. The maximum potential gain can be calculated by taking the spread width, less the premium paid and multiplying by 100. That give us:
5 – 3.30 x 100 = $170.
If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 51.52%.
The probability of profit is 48.0%, although this is just an estimate and does not indicate the probability of achieving the maximum profit.
Mitigating Risk
With any option trade, it’s important to have a plan in place on how you will manage the trade if it moves against you.
For a bull call spread, setting a stop loss of 50% of the premium paid is a good idea. In the first COIN example above, that would be a loss of around $175. For the second example, the stop loss would be around $165.
Traders may also consider a stop loss if COIN breaks below key support at $175.
Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
