Coinbase Global (COIN) stock is up 68% since Feb. 23, as Bitcoin has soared 37%. As Bitcoin's (BTC-USD) halving date of April 17 approaches COIN stock is likely to keep rising with Bitcoin. This has hiked COIN's put option premiums and makes them very attractive for short-put plays.
Bitcoin is set to reduce the number of BTC coins by half that Bitcoin miners can make with each successful hashing attempt. Typically this occurs every four years and analysts expect that the next date this will occur is on April 17. Since miners will have to use new updated ASIC servers and due to the lower number of Bitcoins that will be in supply, this is expected to increase the Bitcoin price. And, of course, in anticipation of this, Bitcoin's price has been soaring.
As a result, Coinbase Global is likely experiencing a high degree of trading in cryptocurrencies this quarter. That is likely what is pushing the stock higher, along with the new introduction of ETF funds trading in Bitcoin. How how can COIN stock rise?
Price Target
As I pointed out in my Feb 26 article, Coinbase is likely to make significant free cash flow (FCF). I estimated the company could make $1.3 billion in operating cash flow (OCF) using a 33% OCF margin. That is the OCF margin it made in Q4 2023.
However, now analysts surveyed by Seeking Alpha project that revenue this year could be as high as $4.79 billion. Using a 33% OCF margin implies that its cash flow could rise to $1.6 billion in 2024. That is significantly higher than my prior estimate.
Using a 1.5% FCF yield metric allows us to value COIN stock. This is the same as assuming that if the company paid out 100% of its operating cash flow, the market would give the stock a 1.5% dividend yield.
So, dividing $1.6 billion in OCF by 1.5% gives Coinbase a potential market cap of $106.66 billion. That is still 44% higher than today's market cap of $68 billion, plus another 9% for today's rise (i.e., $74 billion) to $278.66 per share. In other words, the potential upside is $107 billion and that is still 44.6% higher than today's $74 billion market cap.
This puts COIN stock on a price target of at least $403 per share. This means that it makes sense to short near-term put options to harvest their extremely high put option premiums.
Shorting Put Options for Income
I described this play in my last article on March 17, “Coinbase Put Options Are Sky High - Worth Shorting for Income in Nearby Expiry Periods.” I discussed shorting the $217.50 strike price put option expiring on March 28. At the time COIN stock was at $241.63 and the put option premium was $7.05. In other words, for a strike price that was 10% out-of-the-money (OTM) (i.e., $217.50/$2410.63-1), the investor could make a 3.25% immediate yield (i.e., $7.05/$217.50).
Today, those puts are trading for just 18 cents, so the trade is hugely successful for short sellers. But it especially makes sense for long holders of COIN stock, as they get to keep the unrealized gains in COIN stock as well.
It makes sense to repeat this trade for a nearby expiry period. For example, the April 12 expiration period, which is less than 3 weeks away, shows that the $260 strike price puts trade for $14.25 on the bid side.
This implies that an investor who shorts these puts can make an immediate yield of 5.48% (i.e., $14.25/$260.00) for a strike price that is 6.80% out-of-the-money (i.e., $260/$279.00-1).
Moreover, those less willing to take on this risk can short the $252.50 strike price and still receive $10.95. That strike price is 9.49% out-of-the-money, and the yield is still high at 4.336% for less than 3 weeks until expiration.
The bottom line is that this kind of trade will work well for those willing to hold COIN stock. That way, if the stock keeps rising, as I suspect it will due to the halving event coming up, they can gain the upside in the stock as well as the extra income.
Just keep in mind that if the stock reverses it could be quite volatile. That could mean the investor has to buy shares at an underwater strike price, leading to an unrealized capital loss.
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.
