Since reporting its earnings on Feb 15, Coinbase Global (COIN) stock is up over 41% in the past month. As a result, its put options have skyrocketed. Investors expect a retraction. But this is a huge opportunity for short-sellers as an income play.
COIN stock is at $240.37 in morning trading on Friday, March 15. But far out-of-the-money (OTM) puts are at huge premiums. For example, the $217.50 strike price expiring in less than 2 weeks on March 28, is trading for $7.05 per contract. That represents an immediate yield of 3.24% (i.e., $7.05/$217.50).
That means that any investor who secures $21,750 (i.e., 100 shares x $217.50) with their brokerage firm, can then short these puts. They enter an order to “Sell to Open” 1 put contract at $217.50 for expiration on March 28. Then their account will immediately receive $705.
That implies that if this trade can be repeated every 2 weeks for 2 months, the investor can make an expected return (ER) of 26% (i.e., 3.24% x 8 = 25.92%).
Downside Risks
This strike price is 6.69% below the spot price and is out-of-the-money (OTM) by this amount. However, after receiving the premium income, the investor's breakeven point is much lower. For example, $217.50-$7.05 in income received puts the actual breakeven level at $210.45 per share.
That is over $31 below today's price, so COIN stock would have to fall by more than 12.9% before the put investor in this short put play would begin to have a loss. What's more, the loss would only be an unrealized capital loss.
That is because the short put investor is obligated to buy (not sell) the shares at $217.50 if the stock falls to this level (in the next two weeks). They can continue to hold the stock or even sell short OTM call options against this holding.
One way to protect against a huge drop in the stock is to use some of the premium income to buy puts for the same expiration period. For example, the $210 puts trade for $4.75 on the ask side. That strike price is close to the breakeven price (although not after buying the puts at this price).
The point is that there is enough room to buy downside protection with the income received.
More Conservative Options
Investors can also take a more conservative approach. For example, the $200 strike price puts trade for about $2.60 on the bid side. That strike price is over 17% below today's spot price.
So, even if the stock fell by 17% in two weeks, the investor would still have a $2.60 income on a $200 stock price investment. That represents an immediate yield of 1.30%. This looks like a very good potential investment, especially for those investors who already own COIN stock.
For example, if this trade can be repeated every 2 weeks for 2 months, the ER is still high at 10.4%. That helps build up a hedge against any downside in the stock in the future.
The bottom line is that there are ample opportunities for shorting COIN puts to create extra income at today's price.
More Stock Market News from Barchart
- Up 18% YTD, Is Oracle Stock Overvalued?
- Stocks Slide on Higher Bond Yields and Triple Witching
- 7 Income Stocks That Just Raised Their Dividends
- Alphabet vs. Tesla: Which is the Best Magnificent 7 Stock to Buy Now?
