Coinbase Global (COIN) stock is continuing its huge December surge today, up over 6% in morning trading on Dec. 27 to $183.18 per share. The stock is up 155% from its low of $71.86 on Nov. 26.
This is likely due to a huge surge in Bitcoin (^BTCUSD) along with other cryptocurrencies during December. Investors are anticipating and hoping that the SEC will approve trading in ETFs made up of spot-traded (not futures-traded) cryptos.
However, Barchart reports there is large unusual activity in near-term put options. This may be due to hedging activity or short-sellers of the puts for income.
The increase in these put options' volumes can be seen in Barchart's Unusual Stock Options Activity Report today (see below). Three large tranches of puts have traded with high Volume/Outstanding Interest (VOL/OI) ratios.
Two of the three tranches relate to options expiration periods ending this Friday. The third expires on Jan. 5. In other words, the traders are hoping to make money in just 2 to 9 days of trading.
The high VOL/OI ratios and the extremely short-term expiry periods may indicate that it's likely that the initiating actions in these trades were from short-sellers of these puts. That may be the case in two of the tranches as they are now out-of-the-money (OTM).
Shorting OTM COIN Puts for Income
For example, the Jan 5, 2024, put option strike price is $142.00 per share. That is $43.42 below today's price, i.e., it is 23.67% OTM (i.e., $43.42/$183.42). The premium received was 45 cents on the bid side, or a yield of 0.316% based on the strike price (i.e., $0.45/$140.00).
Note the short-put investor has to put up the $142.00 strike price in cash (x 100 shares per put contract), so that is the denominator in the yield calculation. For example, in this case, the investor may have shorted 1,000 contracts at $142.00 per share. So the investor would have had to secure $14.2 million with the brokerage firm. In return, they immediately received $100,450 shorting these contracts. So the immediate yield is $100.45K/$14.2m, or 0.316%.
That may be a good trade from an expected return (ER) standpoint. For example, there are 40 periods of 9 days in a year, so the annualized ER is 40 x 0.316%, or 12.64% annually.
That assumes this exact trade can be repeated every 9 days, which is not likely. Nevertheless, given how far out-of-the-money this trade is there is very low risk and the ER is probably worth the investment risk.
Moreover, remember that the investor does not have to wait until the option expires worthless. They can cover the bet by placing an order to “Buy to Close” in a week or several days as the premium sinks. That allows them to roll the trade over and do it again, increasing the annualized ER.
Investors in Coinbase stock may want to repeat this deep OTM put option short-play to gain extra income. The worst that could happen is that they would have to buy more shares in COIN stock at $142.00, or over 23% below today's price. But the stock would have to crater in 9 days for that to happen. At this point that does not seem very likely.
On the date of publication, Mark R. Hake, CFA 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.
