Bullish Diagonal Spread in COIN | OptionsTrades Today

Key Concepts

• Diagonal Trade: An options strategy involving buying an option with a longer expiration date and selling an option with a shorter expiration date, typically with different strike prices.
• Directional Bias: An investor's opinion on the future direction of an asset's price (e.g., bullish, bearish).
• Volatility (V): A measure of the expected price fluctuations of an asset. Higher volatility implies greater price swings.
• V Differential: The difference between the implied volatility of the option being sold and the implied volatility of the option being bought in a diagonal trade.
• Delta: A measure of an option's sensitivity to a $1 change in the underlying asset's price. Positive delta indicates a bullish position.
• Theta Decay: The rate at which an option's value erodes over time as its expiration date approaches.
• Defined Risk Trade: An options strategy where the maximum potential loss is known and limited.
• Contrarian Role: An investment approach that goes against prevailing market sentiment.
• Wide Call Spread: An options strategy where the strike prices of the call options are significantly apart.

Diagonal Trade on Coinbase (COIN)

The video discusses a specific options trade executed on November 11th, focusing on Coinbase (COIN) as a proxy for Bitcoin's movement. The trader's primary focus is not on the general market, which is near all-time highs, but on Bitcoin, which has been experiencing a significant downturn, trading around $103,455 on its low. This downturn has led to an uptick in volatility.

Strategy: Diagonal Call Spread

The chosen strategy is a diagonal trade on Coinbase, a stock that is following Bitcoin's market lower, down $555 at the time of the discussion. The trader employs a contrarian, bullish directional bias on Coinbase.

Trade Construction and Rationale

1. Buying a Call Option: The trader buys a call option with a longer expiration date (January) and a strike price closer to the current market price.

   • Underlying Asset: Coinbase (COIN)
   • Stock Price at Execution: Approximately $312 (just under $312 when filled, slightly over $312 at the time of discussion).
   • Bought Option: January 320 Call.
   • Implied Volatility (January): Approximately 67.

2. Selling a Call Option: The trader sells a call option with a shorter expiration date (December) and a higher strike price.

   • Sold Option: December 340 Call.
   • Implied Volatility (December): Approximately 70.

Key Trade Parameters and Analysis

• V Differential: The trader highlights the importance of the V differential, which is the difference between the volatility of the sold option (December, 70) and the bought option (January, 67). The trader prefers to sell higher volatility and buy lower volatility, stating, "I like that number meaning I like this number to be higher the one that I'm selling to be higher than the one that I'm buying." This is a crucial aspect of the trade's construction. The trader would not execute this trade if the V differential were reversed.
• Volatility Environment: The trader notes that implied volatility across the board, particularly in January, is "about as low of volatility as you're going to find." This suggests the trader is buying volatility that is expected to remain bid or increase.
• Trade Execution and Pricing:
  • The markets for these options were described as "a little bit wide."
  • The natural bid was $14.75, and the natural offer was $16.35.
  • The trader was filled at $15.30 for the entire spread.
  • The trader emphasizes not chasing the trade and waiting to get filled at their desired price, ideally below the mid-price. The fill at $15.30 with the stock under $312 is considered a good mid-price.
• Trade Characteristics:
  • Delta: The trade has 13 long deltas. This means that for every $1 increase in the stock price, the trade is expected to gain approximately $13, all else being equal. The trader explicitly states, "I'm bullish. I want to have long delta at least on the setup."
  • Probability of Profit (POP): The trader states there is "no probability of profit because we can't tell you what volatility is going to do in the future." This acknowledges the inherent uncertainty in predicting future volatility.
  • Theta Decay: The trade has a positive $7 in theta decay. This means that as time passes, the trade is expected to gain approximately $7 per day, assuming other factors remain constant.
  • Buying Power: The buying power required for this trade is the net debit paid, which is $1,530.
  • Defined Risk: This is a defined risk trade, meaning the maximum potential loss is limited to the initial debit paid, which is $1,530.

Supporting Arguments and Perspectives

• Contrarian Bullishness on Bitcoin: The trader is taking a contrarian stance, believing that Bitcoin (and by extension, Coinbase) is poised for an upward move despite its recent decline.
• Cost-Effective Control: The diagonal trade is described as a "cheap way to control 13 shares of coin." This implies that the strategy offers leverage and exposure to potential upside with a limited capital outlay and defined risk.
• V Differential as a Key Driver: The favorable V differential (selling higher volatility, buying lower) is a critical component of the trade's setup, contributing to its potential profitability and risk profile.

Potential Adjustments and Profit Targets

• If the Trade Goes Against the Trader: If the trade moves unfavorably, the trader would consider buying back the short December call and selling a January call, effectively converting the position into a wider call spread. For example, if they were already long the 320 calls, they might sell the 350s or 360s for $4 or $5, resulting in a net long position of around $10 for the spread. This adjustment would be made if the bullish assumption on Coinbase remains intact.
• Profit Target: The trader's profit target is approximately $1 to $3 (per share, implying a total profit of $100 to $300 on the spread). The speed of the move would influence how quickly this target is reached.

Real-World Application and Brokerage

The video mentions Tasty Trade as the "number one brokerage firm in the galaxy" and highlights that their content is kept free in perpetuity. This suggests a partnership or endorsement of the brokerage platform.

Conclusion

The trader is executing a defined-risk, bullish diagonal call spread on Coinbase, betting on a contrarian upward move in the stock. The strategy leverages a favorable V differential, positive theta decay, and a limited risk profile. The trade is designed to profit from an increase in Coinbase's stock price, with a defined maximum loss of $1,530 and a target profit of $100-$300. The decision is driven by a bullish outlook on Bitcoin and a belief that Coinbase is undervalued at its current price point.