The price of Coinbase (COIN) stock has pulled back in recent weeks, with $240 and $260 looking like potential levels of support.
When a quality company has a minor pullback like this, I like to use a strategy called a diagonal put spread.
This option strategy is an advanced strategy because it utilizes options over different expiration periods and different strike prices.
The strategy involves selling an out-of-the-money put for a near term expiry and then buying a put for around the same price using a later expiry.
The idea with the trade is that the stock might fall a little bit more, but should stay above the short strike price.
Let’s look at an example using Coinbase.
Coinbase Diagonal Put Spread Example
The trade I’m looking at is selling a February 14 put with a strike price of $240 and buying a February 28 put with a strike price of $230.
As of yesterday’s close, the February 14 put could be sold for around $3.40 and the February 28 put could be bought for $4.30.
The net cost on the trade would be $90 and that is the most the trade could lose on the upside.
The risk on the trade is on the downside with a potential maximum loss of $1,090. This is calculated by taking the difference in the spread (10) multiplied by 100 and adding in the cost of the trade (90).
The maximum potential gain is around $900 which would occur if COIN closes right at $240 on February 14.
The trade has a nice profit zone in between $225 and $290.
Aiming for a return of around 10-15% makes sense and I would set a similar stop loss.
The worst-case scenario is a sharp drop in COIN stock early in the trade. For this reason, if the stock drops below $240 in the next few days, I would also consider closing the trade early to minimize losses.
The initial trade set up has a delta of 5 meaning the position is roughly equivalent to owning 5 shares of COIN stock. Note that this delta number can change significantly as the stock starts to move.
Below is the payoff graph with the blue line representing the profit or loss at expiration and the purple line being the trade as of today.
This is how the trade could looks the day before earnings.
So, provided COIN stock stays above $225 in the next week, the trade should be ok. As the trade requires the stock to not drop too much, this would not be an appropriate strategy for bearish traders.
Coinbase Company Details
The Barchart Technical Opinion rating is a 40% Buy with a Weakest short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
Coinbase is a leading cryptocurrency exchange platform that enables users to trade, store, and manage various digital assets.
In 2024, Coinbase's stock experienced a significant rise, increasing by 70% following the approval of 11 Bitcoin ETFs and a surge in Bitcoin's price past $100,000.
The company reported $185 billion in trading volume in the last quarter and is expanding its services in infrastructure, trading, payments, and financial products.
Analysts have projected that Coinbase could surpass traditional brokerage firms like Charles Schwab in market capitalization by 2025, driven by its diversified crypto services and the growing adoption of digital assets.
However, the company continues to navigate regulatory challenges, including ongoing legal disputes with the U.S. Securities and Exchange Commission (SEC) regarding the classification and regulation of its services.
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.
