Since its IPO, Coinbase stock has traded in a range between 282.07 and 429.54. The cryptocurrency exchange debuted earlier this month at 250 per share and closed at 328.28 on its first day of trading.
Investors are probably wondering where Coinbase (COIN) stock will trade from here, and if we knew that we would all be multimillionaires, but we can look to the options market for clues.
Coinbase Stock: Expected Move
In options trading, there is a concept called the expected move. This represents the market’s expected range for an underlying stock, for the specific time period.
The quickest way to work out the expected move is to look up the option chain and simply add together the price of the at-the-money put option and the at-the-money call option. While this approach isn’t as accurate as a detailed calculation, it does serve as a reasonably accurate estimate.
Coinbase stock closed yesterday at 304.54 so we can use the 305 strike call and put for our expected move calculation.
Yesterday, the May expiration 305 call was trading around $20 and the 305 put was around $20.60. Adding these together gives us $40.60.
Now we know that the market is expecting Coinbase stock to trade in a range between 263.94 and 345.14.
We get the upper range by taking Monday’s closing stock price of 304.54 and adding the 40.60.
For the lower end of the range we take the closing stock price and then subtract 40.60.
Some traders will then use this to base where they will place their option trades. For example, bearish traders might place a bear call spread above 345, let’s say using the 350-355 bear call spread.
Yesterday, that spread could be sold for around 85 cents for a return potential of 20.5% on a block of 100 shares ($85 premium/$415 capital at risk).
Bull Put Spread
Bullish traders could look at a bull put spread below 263.94. They might use the 260-255 put strikes.
Yesterday, this trade had around a 17.6% return potential ($75 premium/$425 capital at risk).
It will be interesting to see where Coinbase stock ends on May 21 and whether it stays within the expected range or not.
It’s important to 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 Twitter at @OptiontradinIQ
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