Volatility in Bitcoin has once again dried up as the world's largest cryptocurrency trades in a tight range of around $17,000. Bitcoin's option premiums have come down significantly but volatility remains elevated for highly correlated bitcoin miners.
By placing a short straddle on bitcoin miner Marathon Digital, investors have zero downside risk and can profit even if MARA stock almost doubles by expiration.
A short straddle is an options strategy where an investor takes no view of the up or down direction of shares on inception. Instead, the trader believes shares will move less either way than the market is anticipating.
Short Straddle On MARA Has No Downside Risk
With MARA stock trading around 5.20 a share Friday, investors can consider placing a short straddle by selling the 5 call and 5 put on the January 2024 expiry. This trade can be placed for a credit of $5.15 per share, which also coincides with the maximum gain of $515 if the shares trade at 5 on expiration.
This trade has no downside risk and has a break-even point on the upside of 10.15.
The vast profit range on the trade comes as the premiums for these options are extremely high. Volatility for the January 2024 options is at 143%, which implies MARA stock moving 9% a day on average. Make no mistake Marathon Digital is a volatile stock, having realized 110% and 120% annualized volatility over the past 30 and 250 days, respectively.
Yet, even this seems unlikely to continue. As the hype and leverage around cryptocurrencies have died out, so has volatility. With the Fed pushing even higher interest rates, it is unlikely frenzied buying will come back any time soon. This is a significant headwind for MARA stock, which directly profits from higher crypto coin prices.
MARA Decreases Leverage As Crypto Uncertainty Bites
Operationally Marathon Digital has done well to increase production. After record output in October, the company mined an additional 472 bitcoin in November. Amid sector uncertainty, the company announced Wednesday it had reduced revolver borrowings from $50 million to $30 million in November. If the company continues to deleverage, this could further support lower volatility.
Before placing any options, trade investors should be aware of the risks. The risk here is that the price of Bitcoin once again explodes and MARA stock skyrockets.
With a low market cap, inefficiencies could also occur, such as those that drove share prices to over 75 briefly last year. To limit this risk, investors should close the trade if at any point double the initial credit is lost.
MARA stock has a dismal IBD Composite Rating of 4 and is trading near 52-week lows having lost over 80% year to date.
