It’s the news that cryptocurrency fans are rejoicing about – U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler announced that he will resign from his post on Jan. 20, 2025, coinciding with the inauguration of Donald J. Trump. With that disclosure, a major regulatory headwind that had dogged crypto wallet and service provider Coinbase (COIN) will be removed. Naturally, this news item carries significantly positive implications for COIN stock.
Don't Miss our Black Friday Offers:
- Unlock your investing potential with TipRanks Premium - Now At 40% OFF!
- Make smarter investments with weekly expert stock picks from the Smart Investor Newsletter
As TipRanks’ Joel Baglole mentioned, the SEC previously sued several major blockchain-related enterprises, including Coinbase. Thanks to Trump’s pro-crypto stance, however, when “The Donald” surprisingly won the 2024 presidential election, digital assets flourished. Subsequently, the tide that lifted all boats elevated COIN stock. Although shares have risen considerably since then, it may not be too late to grab some profits.
Let’s be real: the low-hanging fruit has been plucked. However, thanks to the inherent leverage of multi-leg options strategies, it’s possible for speculators to receive substantial returns over a short period of time. It must be said that options are risky due to their all-or-nothing proposition. Still, the right approach and a little luck may go a long way.
Laying the Foundation for a Bull Call Spread in COIN Stock
Obviously, the simplest and most conservative approach for exercising optimism in COIN stock is to buy the equity in the open market. As I explained above, though, the low-hanging fruit has been plucked. Trump winning the election is old news and the market is now looking for fresh catalysts. Therefore, buying COIN stock now may require more patience for the rewards to blossom.
Another approach to consider is to buy Call options, which would give holders the right (but not the obligation) to purchase 100 shares of COIN stock at the listed strike price. Of course, one of the problems here is that Coinbase’s equity is nominally “expensive.” Thus, the underlying premium to acquire viable in-the-money Calls may be onerous for some retail traders.
Enter the Bull Call Spread. Here, you’re buying a Call and simultaneously selling a Call at a higher strike price. Notably, the credit received from the sale (i.e. the Short Call) helps offset some of the debit paid for the bought (long) Call. While the maximum reward is capped by the Short Call strike, the benefit is that your threshold to profitability is reduced by the credit received.
The Call Spread’s Anatomy
Primarily, the goal of the Bull Call spread is for the underlying security to hit or exceed the Short Call strike price. Doing so will return the maximum reward of the option trade. Further, the maximum loss of the Call Spread is defined as the debit paid for entering the trade.
Next, choosing the Long Call strike comes down to personal risk tolerance. Generally speaking, a wider spread between the long and short strikes may feature greater reward potential along with a more expansive profitability zone. However, wider spreads are more expensive because of the high debit paid and/or minimal credit received.
In contrast, narrower spreads between the strike prices tend to be cheaper because the range of profitability is also narrower. As a result, the debit required to enter the trade is lower. However, if your bullish thesis pans out according to plan, these narrow spreads typically impose the least opportunity cost.
Teaching a Trader to Fish for Coinbase Call Spreads
Unfortunately, the nature of options trading is that the bid-ask prices constantly fluctuate. To provide some semblance of an evergreen nature to this article, I’ll focus on teaching you to fish rather than giving it to you. So, the first order of business is to decipher where the market anticipates COIN stock to land. To do this, you may conduct a stochastic analysis.
Essentially, you’re going to reverse engineer your target option chain’s implied volatility (IV) reading to determine a high-low price range. Simply multiply these three metrics: share price, average IV, and the time decay adjustment (which is the square root of the calendar days to expiration divided by 365 days).
As an example, the options chain expiring on December 27 (when calculated from November 24) features 34 days to expiration. In addition, COIN stock last closed at $304.64 while the average IV for this options chain was 90.19%. Multiply these three metrics together, and you arrive at $83.86. That’s how much the market anticipates COIN may rise or fall by December 27.
Hunting for the Right Option
In our example, you may be tempted to select a Call Spread where the Short Call strike closely matches the projected upside target. Mathematically, selecting a Short Call strike of $380 may seem reasonable. However, these projections aren’t always correct and so, it makes sense to give yourself a little cushion.
One trick is to consider TipRanks’ Unusual Options Activity screener. By analyzing what the smart money is buying or selling, we can determine where these professional investors are comfortable distributing their funds. For instance, on November 22, traders sold short 19,145 $370 Calls expiring November 29. In other words, these folks are confident that COIN stock won’t hit that price point by the specified expiration date.
Understanding this framework, you might give yourself more cushion by selecting a short strike price of around $350. As for the Long Call strike, it comes down to how confident you are, understanding that options trades are generally all or nothing. Personally, I prefer less money at risk so I may opt for a narrower Call Spread, say a 340/350 spread or a 345/350 spread.
Is COIN Stock a Buy, According to Analysts?
Turning to Wall Street, Coibase Global stock has a Moderate Buy consensus rating based on nine Buys, seven Holds, and one Sell rating. The average COIN stock price target is $264.20, implying 15.4% downside risk.
The Takeaway: A Critical Step Down Could be a Step up for COIN Stock
With SEC Chair Gary Gensler calling it quits, one of the regulatory headwinds striving against Coinbase Global has been eliminated. That means COIN stock could still be a bullish opportunity despite the already stratospheric ascension. However, prospective speculators may want to consider the natural leverage of multi-leg options trades rather than a simple buy-and-hold strategy.
For the intrepid, the Bull Call Spread can be a powerful weapon. By buying and simultaneously selling Call options, a trader can effectively lower the debit paid to enter the optimistically directional wager. By carefully assessing the risk-reward profile, the market participant can find a Call Spread that maximizes the potential reward while minimizing the opportunity cost.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
