Coinbase Global (COIN) is having unusual call options volume trading today. These in-the-money call options trades due in 2 months highlight some investors' attraction to COIN stock as a near-term buy.
COIN stock is just below $200 at $199.31 today, up 1%. However, the stock is well off its recent high of $265.15 on July 15. Moreover, it recently bottomed out at $189.47 on Aug. 5.
This is after the crypto brokerage firm reported excellent Q2 earnings on Aug. 1, but not to the market's liking. Or maybe it was just a case of “sell on the news” as so often happens now with quarterly earnings.
In any case, value investors now look at the stock and like what they find. That could be one reason why there is an unusually large volume of in-the-money (ITM) call options trading today.
Unusual Call Options Activity Highlights Traders' Bullish Outlook
Barchart's Unusual Stock Options Activity Report today shows that over 15,000 call options contracts have traded today in the $195 strike price call options that expire on Oct. 18. That is almost 2 months away from today (58 days).
Moreover, the strike price is below the spot price of $199, so it is “in-the-money” by about $4 or so. In addition, the mid-price for those call options is $23.48. That means the buyers of those calls expect to see COIN rise by at least $19.48 or almost 10% from today's price. That is because their investment cost is $195+$23.48, or $218.48 at a breakeven level. Therefore, COIN stock has to rise by $19.48 ($218.48-$199, or +9.79% over $199).
In effect, the call option buyers are very optimistic about Coindesk's underlying value and prospects. However, this is if the investors buying these call options expect to exercise their call options and then buy the shares at the strike price.
They could also just be “flipping" the call options. For example, assuming COIN stock rises by 10% to $218.48 in the next month or so will push the value of the call options to well over the intrinsic value of $19.48. Given the time value of money, extrinsic value is remaining for the next month and therefore it's likely that the price of the call options could rise to $40 or higher. That makes the flip profitable by almost double (i.e., $40/$23.48 cost -1 = +70.4%).
Covered Call Seller's Yield is Also Bullish
Similarly, the sellers of these call options could potentially also be bullish. For example, existing investors may be willing to sell these call options for income. In this case, they receive the bid side premium of $23.25. That works out to an immediate covered call yield of about 11.6% (i.e., $23.25/$199 = 0.1183).
That is a very expected return. Moreover, if the stock stays flat over the next two months, it's possible that the investors could close out the trade at a profit, as long as the option premium is below $23.25. That way the investor would not have to sell their shares at a slight loss (i.e., $199- $195 strike price).
In any case, this serves to highlight that both buyers and sellers of this huge volume of call options activity in COIN stock are bullish on the stock.
Why Investors May Be Bullish on COIN Stock
Investors like what they see Coinbase Global reported in its Q2 Shareholder letter. For example, this is now the sixth quarter in a row that the company has generated positive adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization). That is a form of a cash flow metric. It produced $596 million in adj. EBITDA, which also represented 43.18% on its quarterly revenue of $1.38 billion (see table below).
Note, however, that this was lower than the $1 billion in adj. EBITDA last quarter and its revenue was also lower. That accounts for why COIN stock fell after the results.
But investors should not be so negative. This is still a very good return for shareholders.
For example, its operating cash flow for the past six months has been very strong. This measure of cash flow includes more items than adj. EBITDA and is a more realistic measure of the company's operating cash flows. It generated $895.68 million in cash flows from operating activities (CFOA) in the last six months. That can be seen on page 20 of its Shareholder Letter in the Condensed Consolidated Statement of Cash Flows.
This CFOA was 45.8% higher than last year's six months CFOA results. Moreover, it represents a CFOA margin of 29% on its six-month revenue of $3.087 billion. That was lower than the 41.5% CFOA margin last year, but it still represents a very strong result.
Target Prices for COIN Stock
This gives investors hope that COIN stock can continue to do well over the near term, especially if the company continues to show strong cash flow results. For example, if analysts' forecasts of $5.75 billion in revenue this year hold up, the company could generate $1.725 billion in CFOA (operating cash flow).
Therefore, using a 3.0% cash flow yield metric gives COIN stock a possible $57.5 billion valuation (i.e., $1.725b/0.03 = $57.5 billion). That is 17.5% higher than its existing $49 billion market cap today. In other words, COIN stock could be worth $233.43 over the next year (i.e., $199 x 1.173).
Other analysts agree with this analysis. Yahoo! Finance reports that its analyst survey shows an average $263.22 price target for COIN stock. In addition, AnaChart.com, a new sell-side analyst tracking site, reports that 25 analysts who've written recently on the stock have an average price target of $225.89. That is close to my $233.43 price target.
The bottom line here is that investors are flocking back to COIN stock, despite its recent dip after earnings. This could be because they see the stock is undervalued here.
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.
