Coinbase was back in rally mode yesterday. It's 6.3% gain put it back above its 50-day moving average line and an area of resistance around 283.
COIN stock is up 70% in the last three months and is highly correlated with the price of Bitcoin which traded back above 100,000 for part of yesterday. That got us interested in a taking a bullish position. The bull call spread offers a way to do that with lower risk than an outright stock position.
A Bull Call Spread In Need Of Adjustment
To create a bull call spread start with buying a call and then selling a further out-of-the-money call.
Selling the further out-of-the-money call reduces the cost of the trade but also limits the upside.
Going out to the March expiration on Coinbase stock will encompass the Q4 earnings announcement expected around the beginning or middle of February.
After the bullish move yesterday, we considered buying the 310-strike call option and selling the 320 call. That spread traded around $345 yesterday (difference in the option premiums multiplied by 100) and a profit potential of $655 (difference in strike prices, multiplied by 100 less the premium paid).
But, given the 20 point drop in Coinbase today, we decided to adjust those strikes down. Leaving the strikes where they were would have reduced the cost by over $100 and increased the profit potential by more than $100. So why not change it? It would require Coinbase to make an even bigger move in order to be profitable. There's no free lunch. In order to get that lower cost and higher profit, you have to accept a lower probability of success.
Lowering the strikes to a 290 call on the long side and 300 call on the short side drops the cost down to $320 with a profit potential of $680. In order to get maximum profit, Coinbase just has to get above resistance at 300 at the March expiration instead of 320.
Cutting Losses On Coinbase Stock If Things Get Worse
Since Coinbase turned back below the 50-day line, leaning bullish might make you skip the trade all together instead of making the adjustment. At least this is a risk-defined trade where the most you can lose is the cost of the trade. No matter how far below 290 Coinbase trades on March 21, the losses are capped at $315. Plus there is a lot of time for Coinbase to right itself.
But if take the trade and Coinbase continues to struggle, you could always cut the loss early. Setting a loss at 50% or if the spread reaches $155 could reduce the risk further.
According to IBD Stock Checkup, Coinbase ranks No. 2 in its group and has a Composite Rating of 98, an EPS Rating of 81 and a Relative Strength Rating of 92.
As an update, the bull call spread on Nvidia was looking good yesterday and could be closed early.
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
