What are your options - Trading strategies for Coinbase post-Bitcoin spot ETF approval What are your options - Trading strategies for Coinbase post-Bitcoin spot ETF approval What are your options - Trading strategies for Coinbase post-Bitcoin spot ETF approval

What are your options - Trading strategies for Coinbase post-Bitcoin spot ETF approval

Options 10 minutes to read
Koen Hoorelbeke

Options Strategist

Summary:  The SEC's nod to Bitcoin spot ETFs opens new trading prospects in the US, indirectly benefiting European options traders by likely enhancing liquidity and enabling more effective Bitcoin options trading. Coinbase's role as custodian for several ETFs and its stock's recent price dip post-announcement brings diverse options strategies into focus for traders eyeing the cryptocurrency's volatility. As the market adapts, these strategies offer avenues for risk management and profit across varying market sentiments.


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Trading strategies for Coinbase post-Bitcoin spot ETF approval

Introduction

The approval of 11 Bitcoin spot ETFs by the SEC represents a notable development within the cryptocurrency market. This decision may introduce substantial changes for investors, especially within the US market. Coinbase, as the custodian for 8 of these ETFs, may be significantly affected by these market changes. The primary consideration for traders is how this event could influence trading strategies for Coinbase.

(see also related articles at the bottom of this article!)

Impact of Bitcoin spot ETFs: analytical perspectives

The launch of Bitcoin futures in 2017 was met with a substantial market reaction, a scenario some investors might anticipate repeating with the introduction of Bitcoin spot ETFs. In other markets, physical ETFs have had a positive impact on asset prices. Investors are observing whether similar market dynamics will unfold with Bitcoin spot ETFs and whether Coinbase's position as a custodian will align with potential price movements of Bitcoin.

Considerations for European investors

The SEC's approval of Bitcoin spot ETFs may not significantly alter the landscape for European investors, who have had access to cryptocurrency ETFs for some time. However, the implication for options trading on these ETFs could present new opportunities, given the volatility of Bitcoin. The availability of options trading on these ETFs is projected to be an important development for global options traders.

While direct investment in the newly approved Bitcoin spot ETFs might be limited for European investors due to UCITS compliance requirements, the secondary effects of these ETFs could be far-reaching. The introduction of options on these ETFs is anticipated to be a pivotal development, especially for those looking to gain exposure to Bitcoin's price movements through derivative instruments.

European markets currently offer cryptocurrency ETFs, but they frequently suffer from inadequate liquidity, limiting the practicality and appeal of options trading on these instruments. The expected increase in volume and liquidity in one or more of the new US-listed ETFs could present European investors with a more viable alternative. The higher trading volumes typically associated with US markets are likely to translate into deeper options markets, offering tighter bid-ask spreads, better price discovery, and more efficient execution of trades.

For European traders, this could mean enhanced access to Bitcoin’s volatility without needing to trade the cryptocurrency directly. Options allow for strategic positions to be taken with defined risk parameters, which can be particularly appealing when dealing with an asset as volatile as Bitcoin. As such, even if European investors do not participate in the ETFs directly, the ripple effects of increased liquidity and the formation of a robust options market on these ETFs will provide a new avenue to strategize and potentially profit from the cryptocurrency’s price movements.

In essence, the SEC's approval of Bitcoin spot ETFs is expected to indirectly benefit European options traders by offering an alternative pathway to engage with Bitcoin's price volatility through a potentially more liquid and accessible options market.

Coinbase's market reaction

Following the SEC announcement, Coinbase's stock price experienced a decrease of approximately +/-6%. This movement raises questions about future price trends. Will the price of Coinbase continue to decline, or is this a temporary setback? The performance of Coinbase's stock in the coming period is of interest to investors, given its correlation with Bitcoin and its role as a custodian for the new ETFs.

Trading setups for Coinbase: bullish, neutral, or bearish?

The current market conditions, characterized by an IV Rank of 29.25% and a downward trend, present various opportunities for options trading. Strategies can be adapted to different market views regarding the future performance of Coinbase. The setups we will explore are designed to accommodate a range of market expectations.

Important note: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.

In this article we're going to cover the following strategies:

  • Bullish strategy
    • Short/Credit Put Vertical Spread
        
  • Neutral / range bound strategy
    • Short Iron Condor
       
  • Bearish strategy
    • Short/Credit Call Vertical Spread
 

Chart of Coinbase, showing the strike levels discussed in the article below, also showing a 1 standard deviation probability envelope

Bullish Strategy

Bullish trading setup on Coinbase

The above screenshot illustrates a vertical put spread, also known as a bull put spread, which is an options strategy that involves selling a put option and buying another put with the same expiration date but a lower strike price. Here's the breakdown:

  • Sell to Open: 1 Put with a Strike Price of $120, Expiry 16-Feb-2024
  • Buy to Open: 1 Put with a Strike Price of $115, Expiry 16-Feb-2024

This setup results in receiving a net credit (premium) of $125.00 USD, as indicated by the details in the screenshot.

Financial implications:

  • Maximum Risk (Max Loss): The maximum risk on this trade is $375.00. This occurs if the price of Coinbase (COIN) falls below $115 by expiration, as both put options would be in the money, with the loss being the difference in strike prices minus the premium received.
  • Maximum Profit (Max Gain): The maximum profit is limited to the initial credit received, which is $125.00. This maximum profit is realized if Coinbase stays above the higher strike price of $120 by expiration, allowing both puts to expire worthless.
  • Break-even Point: The break-even point for this trade is $118.75, calculated by subtracting the premium received from the higher strike price ($120 - $1.25).

Market analysis:

  • Premium: The premium received is relatively high due to the implied volatility (IV) rank being at 29.25%, suggesting that options prices may be inflated compared to the historical volatility of the stock.
  • Stock performance: With the recent 5% dip in Coinbase's price following the Bitcoin ETF announcement, this trade assumes that the price will not fall significantly further and will stay above the break-even point by expiration.
  • Volatility: A decreasing IV rank indicates that market expectations of volatility are lowering, which can be favorable for this credit spread as the value of the options sold could decrease faster than the ones bought.

Strategic summary: This bullish setup on Coinbase indicates a belief that the stock will not drop significantly further and that the recent dip may be a buying opportunity. It capitalizes on the current elevated options premiums due to the implied volatility. The trader is obligated to buy Coinbase stock at $120 if the price drops below this level but has hedged this obligation by acquiring the right to sell shares at $115. The net credit enhances the trader's position as long as the share price remains above $118.75.


Neutral Trading Setup on Coinbase: Iron Condor

The strategy depicted is an iron condor, which is an options strategy involving four different contracts:

  • Sell to Open: 1 Call with a Strike Price of $180, Expiry 16-Feb-2024
  • Buy to Open: 1 Call with a Strike Price of $200, Expiry 16-Feb-2024 (Protective call to cap the risk on the upside)
  • Sell to Open: 1 Put with a Strike Price of $120, Expiry 16-Feb-2024
  • Buy to Open: 1 Put with a Strike Price of $100, Expiry 16-Feb-2024 (Protective put to cap the risk on the downside)

Financial implications:

  • Maximum risk (max loss): The maximum risk for this trade is substantial at $1,450.00, calculated as the difference between the strikes of the puts or calls (whichever is wider) minus the net credit received, times the number of contracts.
  • Maximum profit (max gain): The maximum profit is the premium collected, which is $550.00. This maximum profit is achieved if the price of Coinbase stays between the sold strike prices ($120 and $180) by expiration.
  • Break-even points: There are two break-even points for this trade. The upper break-even point is at $185.50, calculated by adding the net credit to the sold call strike price. The lower break-even point is at $114.50, calculated by subtracting the net credit from the sold put strike price.

Market analysis:

  • Premium: The relatively high premium reflects the strategy’s exposure and the current market volatility, as indicated by the IV Rank.
  • Stock performance: The price of Coinbase has recently dipped, and the iron condor strategy suggests the belief that the stock will stabilize and trade within a certain range. This is a typical neutral strategy where significant movements in either direction are not expected.
  • Volatility: A neutral strategy like an iron condor benefits from decreasing implied volatility because it relies on time decay to erode the value of the options. This is consistent with the current declining IV Rank.

Strategic summary: The iron condor setup on Coinbase is a neutral strategy that anticipates the stock to trade within a specific range until expiration. It takes advantage of the time decay of options and the current premium levels to potentially generate income. The trader is looking to benefit from the passage of time rather than a directional move in the stock price. This strategy has defined risk and reward parameters and requires the stock to stay between the break-even points for maximum profitability.


Bearish Trading Setup on Coinbase: Bear Call Spread

This bear call spread is composed of the following options:

  • Sell to Open: 1 Call with a Strike Price of $165, Expiry 16-Feb-2024
  • Buy to Open: 1 Call with a Strike Price of $170, Expiry 16-Feb-2024

This setup results in a net credit (premium) of $105.00 USD.

Financial implications:

  • Maximum risk (max loss): The maximum risk is $395.00, which is the difference between the strike prices ($5) minus the credit received ($1.05) times 100 (since each option contract typically represents 100 shares).
  • Maximum profit (max gain): The maximum profit is the credit received, which is $105.00. This will be realized if Coinbase stays below the lower strike price of $165 by expiration.
  • Break-even point: The break-even for this trade is $166.05, which is the lower strike price plus the credit received ($165 + $1.05).

Market analysis:

  • Premium: The credit received is a reflection of the current option premiums, influenced by the implied volatility in the market.
  • Stock performance: Coinbase's stock has seen a decline, and this bear call spread anticipates that the stock will not recover past the $165 mark by the expiration date.
  • Volatility: The trade is designed to benefit from a decrease in the stock's price, and with the IV Rank indicating a moderately high level of volatility, the premium received is decent for the risk undertaken.

Strategic summary: This bear call spread indicates a belief that Coinbase's stock will experience a bearish trend or at least not rise above the break-even point of $166.05 by the expiration date. The trader employing this strategy anticipates that the recent developments, despite the bullish news of Bitcoin spot ETFs, will not translate into an immediate positive price movement for Coinbase. The trader receives an upfront premium and will retain the full amount if the stock price remains below $165.


© BarChart.com

Conclusion

The introduction of Bitcoin spot ETFs has indeed stirred the financial markets, particularly for Coinbase. By examining three distinct options trading strategies – a bullish vertical put spread, a neutral iron condor, and a bearish vertical call spread – traders can align their positions with their market expectations. These strategies not only reflect the complexity and adaptability of options trading but also highlight the importance of understanding market sentiment, volatility, and the interplay between industry news and financial instruments.


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This article may or may not have been enriched with the support of advanced AI technology, including OpenAI's ChatGPT and/or other similar platforms. The initial setup, research and final proofing are done by the author.

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