Riot Platforms continues to languish below declining 50- and 200-day moving averages.
Investors who think the bitcoin mining company will continue to drop and don't want to risk significant capital can buy put options to benefit from a continued decline.
A put option is a contract between a buyer and seller. The contract gives the buyer the right to sell a certain stock at a certain price (strike price) up until a certain date (expiration date).
A put option enables investors to speculate on the decline of the stock price without needing to own the underlying stock or sell it short.
If the stock falls as anticipated, the value of the put option increases, allowing the investor to sell the option at a higher price or exercise it for a profit.
Unlike short selling, where potential losses are unlimited, the maximum loss for an investor buying a put option is limited to the premium paid for the option.
Put Option On Bitcoin Mining Stock
Buying one Riot 9-strike put option expiring on Dec. 20 would cost around $2 per contract, or $200 in total.
The trade would need Riot stock to fall below 7 by expiration to be profitable. But profits can also be achieved at higher prices if Riot stock falls early in the trade.
The most the trade can lose is the premium paid of $200. That would occur if Riot finished above 10 on Dec. 20.
However, if Riot stock tanks, profits are unlimited up to the point of the stock reaching zero.
Using options in this way can be a great way to short a stock without risking too much capital.
Savvy traders can further reduce the risk by selling an out-of-the-money put, turning the trade into a bear put spread.
For example, selling the Dec. 20, 6-strike call would reduce the trade cost by around $65. But it would also limit the upside below 6.
A stop loss could be set if Riot rises 8% from the entry point, or if the put option has lost 50% of its value.
Time Decay Hurts Bitcoin Mining Stock Trade
One downside of buying put options is that they lose money as time passes through time decay, so the earlier the move lower comes, the better.
According to the IBD Stock Checkup, Riot stock is not ranked in its group. The bitcoin mining company has a Composite Rating of 54, and EPS Rating of 82 and a Relative Strength Rating of 14.
Riot Platforms is due to report earnings in early to mid-August, so this trade would have exposure to earnings if held through that date.
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
