Coinbase recently earned a Relative Strength Rating upgrade from Investor's Business Daily, rising to 84 from 79. Further, Coinbase stock sits above its rising 21-day, 50-day and 200-day moving averages.
As a result, traders looking for a more conservative way to play Coinbase stock using options could employ a bull put spread. The strategy involves simultaneously selling a higher strike put option while buying a lower strike put option in the same expiration cycle.
A bull put spread is a defined risk strategy, so investors always know the worst-case scenario in advance. This type of trade will profit if Coinbase stock trades sideways or higher. It even may profit if it trades slightly lower, offering flexibility in uncertain markets.
In exchange for selling the bull put spread, the trader receives the option premium. This has risk equal to the difference in strike prices, less the premium received.
The stock closely follows the price of bitcoin and should continue to benefit from bitcoin's 7.75% rally in the last five days.
Setting Up The Coinbase Stock Trade
Traders who think Coinbase will stay above 220 for the next few weeks could sell a bull put spread using a July 18 expiration. That starts by selling a put at 220 and buying a 210 put. The combination brought in a net credit of $1.50 per share this morning. Further, selling this spread in a contract of 100 shares generates roughly $150 in premium with a maximum risk of $850.
If the spread expires worthless, that would be an 18% return in just over one month. That assumes Coinbase stock is above 220 at expiration. The maximum loss would occur if Coinbase stock closes below 210 on July 18. The premium seller would lose $850 on the trade.
The break-even point for the trade is 218.50, which is calculated as 220 less the $1.50 option premium per contract. That's 14.9% below Monday's closing price.
It's best to set a stop-loss if the stock breaks back below 240. Alternatively, you could use a stop loss if the value of the spread increased from $1.50 to $3. Sticking to this stop-loss level will help avoid large losses if the trade goes south.
Where Coinbase Ranks
According to the IBD Stock Checkup, Coinbase stock ranks No. 18 in its group. Further, it has a Composite Rating of 77, an EPS Rating of 37 and a Relative Strength Rating of 84.
For investors seeking income generation with defined risk parameters, this bull put spread presents an appealing opportunity in the current market environment.
Please remember that options are risky, and investors also 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.
Gavin McMaster has a masters in applied finance and investment. He specializes in income trading using options, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
