Today, we're looking at a bull put spread idea on Coinbase, the trading platform for bitcoin and other cryptocurrencies.
Coinbase stock has pulled back from overbought levels and could find support around 220, which was the low from March 19.
Traders willing to bet that Coinbase will stay above 220 for the next two weeks could look at a bull put spread trade.
As a reminder, a bull put spread is a defined-risk strategy: You always know the worst-case scenario in advance.
This type of trade will profit if Coinbase stock trades sideways or higher, and even sometimes if it trades slightly lower.
With COIN trading around 245, if we use the April 19 expiration, we can sell a 220 put and buy a 215 put for around $1.20.
Trade Could Return 31% In 4 Weeks
Selling this spread would generate roughly $120 in premium with a maximum risk of $380.
If the spread expires worthless, that would be a 31% return in about three weeks. That's provided Coinbase stock is above 220 at expiration.
The maximum loss would occur if COIN stock closes below 215 on April 19, which would see the premium seller lose $380 on the trade.
The break-even point for the trade is 218.80. That's calculated as 220 less the $1.20 option premium per contract.
Exit Strategy For Coinbase Trade
I would set a stop loss if the loss is equal to the amount of premium received, which in this case would be $120.
Sticking to this stop-loss level will help avoid large losses if the trade goes south.
According to the IBD Stock Checkup, Coinbase is ranked No. 1 in its industry group. It has a Composite Rating of 99, an EPS Rating of 76 and a Relative Strength Rating of 99.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
