Overview
On July 10, 2024, I initiated a vertical put option strategy on Coinbase (COIN) $Coinbase Global, Inc.(COIN)$ with a maturity date of August 9, 2024. This strategy involved selling a put option with a strike price of USD 180 and buying a put option with a strike price of USD 175, for which I collected a net premium of USD 70 per contract.
Strategy Justification
The decision to implement this vertical put option strategy was driven by several key factors:
Favorable Regulatory Shifts: Recent changes in the regulatory landscape are expected to benefit Coinbase. The Supreme Court's rescission of the Chevron deference is anticipated to reduce the SEC's influence over the crypto market. This shift could lead to a more favorable regulatory environment for Coinbase, which in turn, could bolster investor confidence and potentially drive the stock price higher.
Growth Potential: Despite ongoing challenges with the SEC, Coinbase is poised for significant growth. The improved legal and legislative conditions are expected to unleash innovation in the crypto market, providing a strong tailwind for Coinbase's business model and financial performance.
Risk Management: By choosing a vertical put spread, I was able to limit my potential downside risk. Selling the USD 180 put option while simultaneously buying the USD 175 put option created a defined risk-reward scenario. The maximum potential loss is limited to the difference between the strike prices (USD 5) minus the collected premium (USD 70), while the maximum potential gain is capped at the collected premium.
Market Expectations
Given the current market conditions and the expected regulatory changes, my outlook for Coinbase remains positive. The reduced regulatory pressure is likely to enhance market sentiment towards crypto-related stocks, including Coinbase. This improved sentiment could result in upward price movement, reducing the likelihood of COIN trading below the USD 180 strike price by the maturity date.
Potential Outcomes
Breakeven Point: The breakeven point for this strategy is USD 179.30 (strike price of USD 180 minus the collected premium of USD 0.70). If COIN trades above this level at expiration, the strategy will be profitable.
Maximum Profit: If COIN trades at or above USD 180 at expiration, the maximum profit will be the collected premium of USD 70 per contract.
Maximum Loss: If COIN trades at or below USD 175 at expiration, the maximum loss will be limited to USD 430 per contract (USD 5 difference between strike prices minus USD 70 premium collected).
Reflection
This vertical put option strategy reflects a moderately bullish stance on Coinbase, factoring in the potential positive impacts of regulatory changes. The choice of strike prices and the premium collected offer a balanced approach to risk and reward. However, it is essential to continuously monitor market developments and adjust the strategy as needed to mitigate any unforeseen risks.
Overall, this investment strategy is well-aligned with the current market outlook and the expected growth trajectory of Coinbase, providing a calculated approach to capitalize on potential gains while managing downside risk effectively.
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