Coinbase stock is a big beneficiary from the election with the president elect pledging in July to make the U.S. "the bitcoin superpower of the world" and create a strategic reserve of bitcoin.
That bodes well for Coinbase, and investors piled into the stock Wednesday, sending it 31.1% higher.
Traders who think Coinbase will stay above 200 for the next few weeks could look at a bull put spread.
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 even sometimes if it trades slightly lower.
With the stock trading around 254, if we use the Dec. 20 expiration, we can sell a 200 put and buy a 195 put for around $0.95.
Selling this spread would generate roughly $95 in premium with a maximum risk of $405.
Max Return Of 23% On Coinbase Stock
If the spread expires worthless, that would be a 23.45% return in six weeks, provided Coinbase stock is above 200 at expiration.
The maximum loss would occur if Coinbase stock closes below 195 on Dec. 20 which would see the premium seller lose $405 on the trade.
The breakeven point for the trade is 199.05, which is calculated as 200 less the $0.95 option premium per contract.
I would set a stop loss if the loss is equal to the amount of premium received. In this case, it would be $95.
Sticking to this stop loss level will help avoid large losses if the trade goes south.
Coinbase Stock A Leader In Its Industry
According to the IBD Stock Checkup, Coinbase is ranked No. 4 in its industry group. It has a Composite Rating of 98, an EPS Rating of 81 and a Relative Strength Rating of 96.
Coinbase has already reported earnings, so this trade should not have any earnings risk.
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.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
