As a rule of thumb, investment market writers should choose different sectors to cover to keep the content flow fresh and varied. However, with all eyes turning to the cryptocurrency space due to its recent conspicuous fallout, Coinbase (COIN) is now on my radar. Yesterday, blockchain miner Riot Platforms (RIOT) represented my go-to story.
Fundamentally, the backdrop presented a rough environment for the once-skyrocketing blockchain-mining industry. In particular, trading volume for major coins and tokens slumped to their lowest level of the year last month. While cryptos have incurred volume declines before, the current deterioration comes amid an incredibly challenging post-pandemic economic recovery.
Regarding the technical concerns for RIOT, its implied volatility (IV) trend demonstrated heightened IV at the two extremes of the strike price spectrum: far out-of-money (OTM) direction and deep in-the-money (ITM) direction. However, the deep ITM strikes printed a far higher magnitude IV, possibly indicating mitigation of tail risks (i.e. black swan events).
Notably, it’s a similar situation for COIN stock but with some nuances that are worth paying attention to.
COIN Stock Incurs Lower Than Usual Options Trading Volume
Typically, Barchart’s screener for unusual stock options volume centers on the underlying metric coming in hotter than usual. Generally, this dynamic indicates a desire to engage the target options. However, with COIN stock, volume landed lower than is typical.
Following the close of the Sept. 11 session, total volume reached 97,252 contracts against open interest of 808,791. Against the trailing one-month average metric, Monday’s stat fell 17.71%. In terms of the transactional breakdown, call volume was 49,367 contracts versus put volume of 47,885 contracts. This pairing yielded a put/call ratio of 0.97, practically dead-even.
On surface level, such a framework might seem to imply neutral trading. However, the sizable volume decline against typical norms may suggest a loss of confidence. Basically, investors may be reducing their exposure to speculative asset classes and shifting their funds toward safer, more historically reliable assets.
To be clear, the options market represents a complex web of intricate tactics and strategies so it’s difficult to pinpoint exact motivations. However, with COIN stock acting almost as a proxy for the wider digital asset sector, the sudden negative shift in sentiment seems telling, especially in the context of Monday’s crypto fallout.
According to Coinmarketcap, the total market capitalization of all cryptos landed a hair above the $1 trillion mark. Subsequently, the bulls launched an emergency bounce back but the damage may be done. With the bears smelling blood, virtual currencies could fall even further. If so, backing out exposure to COIN stock would be a prudent move; hence, possibly explaining the aforementioned volume drop.
Traders Appear to Hedge Against a Possible Coinbase Correction
As with Riot Platforms, Coinbase’s options dynamic – as represented by its volatility smile – presents another point of concern. Again, we find that in both the far OTM direction and deep ITM direction, IV shoots higher. However, the magnitude of IV is noticeably greater on the lower strike price range than its countervailing range.
Technically, the main takeaway is that while investors see upside potential for COIN stock, they also recognize the possibility of a severe correction materializing. For instance, the Sep 15 '23 $100 Call has seen rising open interest against a declining delta due to the OTM contract reaching closer to expiration. Some of the rise in volume could be attributed to cheap speculation.
At the same time, traders are also possibly waking up to the reality that COIN stock could stumble. Take a look at the Sep 15 '23 $70 Put, which has also witnessed a rise in open interest despite careening toward expiration.
Finally, some institutional investors appear to be advantaging the euphoria behind COIN stock, which quite frankly is the smart thing to do. With IV heightened at both ends of the strike price spectrum, options flow data – which filters for big block trades likely made by institutions – displays both sold puts and calls.
Think about IV as a pro baseball player’s assessment report or “book” as it’s known. A standout book doesn’t guarantee standout performance. However, stellar books generally translate to higher demand. Now, if demand gets so high, a team is incentivized to trade the player in question in return for a boatload of quality prospects.
With institutional players apparently not wanting to mess around with directional wagers, that might be another reason to be cautious about COIN stock. Put another way, these traders see little reason to buy the steak but rather to sell the sizzle.
Conclusion: Think Before HODL-ing
Given the emotional nature of cryptos and their related investment classes, COIN stock will likely command bullish interest no matter what. These folks are determined to HODL or hold on for dear life. However, stepping away from this mentality toward a more agnostic one would be helpful. With the smart money seemingly deploying protective measures, retail investors should read between the lines.
On the date of publication, Josh Enomoto 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.
