Large numbers of call options in Coinbase (COIN) that expire on Oct. 27 have been trading today. Coinbase will report its Q3 earnings on Nov. 2 (after the market close) and investors can begin submitting questions on Oct. 26.
This huge call options activity suggests that investors in COIN stock may think the worst is over for the crypto market. In fact, COIN has fallen $21.57 from $99.77 on July 26 to $78.20 today (morning trading on Monday, Oct. 23). That represents a drop of over 21.6% in the past 3 months.
COIN could face a big turnaround ahead of its earnings as investors contemplate a bullish outlook on the crypto market from Coinbase management. That could be why the huge volume of call options traded today.
Huge Call Volume in COIN
For example, Barchart's analysis shows that over 7,700 call options at the $80 strike price have been traded today for the Oct. 27 expiration period. This is over 3 times the normal trading in these calls.
Moreover, the midpoint premium is $1.78, implying that long investors in these out-of-the-money (OTM) calls believe that COIN stock will rise over $81.78 per share by the close of trading on Friday. That means they hope the stock will rise by 4.57% from today's price (i.e., $81.78/$78.20 - 1).
What is the basis for this bullish sentiment?
Crypto Turnaround or Excessive Pessimism
Bitcoin is up from $25,162 on Sept. 11 to almost $31,000 today ($30,962 as of mid-morning Oct. 23). That represents a huge jump of over 23% in the past month and a half. That could be one major reason investors in COIN calls today are so bullish.
They may be assuming that Coinbase experienced a surge in crypto trading in the latter half of Q3 and certainly during October. As a result, that could increase the company's revenue line to over $655 million, as forecast by analysts surveyed by Seeking Alpha.
Moreover, the stock may simply be enjoying a turnaround from a low inflection point based on excessive pessimism. Investors are trying to line up more shares taking advantage of this change in sentiment in COIN stock. That is why long buyers in COIN call options may believe it could rise further.
Taking Advantage of High Premiums by Shorting OTM Puts
One way to alternatively play this trend is to sell short out-of-the-money put options in near-term expiration periods. This is because their premiums have high put yields now.
For example, the $73.00 strike price, which is 6.57% below today's spot price of $78.20, are selling for $4.05 in the Nov. 10 expiration period. That represents a huge 5.54% put yield since the $4.05 premium received selling these puts short work out to 5.54% of the $73.00 strike price.
Moreover, short-put investors have protection down to $68.95 per share (i.e., $73.00 - $4.05) before they would be required to buy the stock. That represents an 11.8% downside protection or breakeven point (i.e., $68.95/$78.20 - 1).
Here is what this means on a practical basis. The investor first secures $7,300 in cash and/or margin for every put contract they want to short. So, if they want to short 3 put contracts, they must insert $21,900 in new cash and/or available margin with their brokerage firm.
Then they can enter an order to “Sell to Open” 3 put contracts at $73.00 for expiration on Nov. 10. The account will then immediately receive $1,215 (i.e., 3 x $4.05 x 100). That results in an immediate yield of 5.547% of the $21,900 invested.
Now, if this contract expires worthless in 18 days and the trade can be repeated every 3 weeks for a year (i.e., 17x), the annualized expected (ER) is $20,655. Based on the $21,900 invested each time, that ER is 94.3%, a fantastic potential upside.
Obviously, each time this is done the short put yield will change. But this goes to show that this is one alternative way to make money now in COIN stock. This takes advantage of the present high yields in the near-term options market for the stock.
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.
