Coinbase continues to explode higher on the back of a rising bitcoin price as shares hit a new all-time high on Thursday. Coinbase stock closely follows the price of bitcoin and should continue to benefit from the cryptocurrency's impressive rally.
Traders looking for a more conservative way to play Coinbase stock via options could use a bull put spread. We looked at a similar trade back in June that worked very well.
As a reminder, a bull put spread is a defined-risk strategy, so you always know the worst-case scenario in advance. This type of trade will profit if Coinbase stock trades sideways or higher and also sometimes if it trades slightly lower, offering flexibility in uncertain markets.
The strategy involves simultaneously selling a higher strike put option while buying a lower strike put option in the same expiration cycle. In exchange for selling the spread, the trader receives the option premium and has risk equal to the difference in strike prices, less the premium received.
Setting Up The Trade On Coinbase Stock
Traders that think Coinbase will stay above 340 for the next few weeks could sell an Aug. 15 put at the 340 strike and buy a 330 put. This bull put spread traded around $2.35 on Friday. With a contract of 100 shares, selling this spread generates roughly $235 in premium with a maximum risk of $765.
Meanwhile, if the spread expires worthless (the best case scenario) that would be a 30.7% return in just over one month. That assumes Coinbase stock sits above 340 at expiration. The maximum loss occurs if Coinbase stock closes below 330 on Aug. 15. In that case, the premium seller loses $765 on the trade. That's simply the difference in strikes minus premium received.
The break-even point for the trade is 337.65, which is calculated as 340 less the $2.35 option premium per contract. That's 13.2% below Thursday's closing price of 388.96.
It's best to set a stop-loss if the stock breaks back below 360. That's also the case if the spread increases in value from $2.35 to $4.70. Sticking to this stop-loss level will help avoid large losses if the trade goes south.
Composite Rating At 95
According to Investor's Business Daily's IBD Stock Checkup, Coinbase stock ranks No. 8 in its group. Further, it has a Composite Rating of 95, an Earnings Per Share Rating of 36 and a Relative Strength Rating of 97.
For investors seeking income generation with defined risk parameters, this Coinbase strategy presents an appealing opportunity in the current market environment.
But with Coinbase earnings scheduled for Aug. 7, traders should also consider closing the position beforehand to avoid earnings risk.
It's important to remember that options are risky and investors can lose 100% of their investment.
Gavin McMaster is founder and operator of Options Trading IQ, a website offering instruction on how to buy and sell options. Follow him on X/Twitter at @OptiontradinIQ.
