Covered Calls on Coinbase

Thanks to a reader suggestion, I am covering Coinbase (COIN) today.

Remember, you can always reply to this email to give me suggestions or ask questions. I read every email I get from readers.

Coinbase

COIN has relatively high IV (in the 60% range for near-the-money calls on the August 13 strike), which makes it good for option trading.

But is it a good stock for the covered call strategy?

For covered calls, the best setup is owning a stock that you believe in long-term, but aren’t extremely bullish in the near-term on. In other words, if you believe in Coinbase over the long-term and want to own it, but also believe that the IV is too high and calls are overpriced here, it’s a good time to trade covered calls.

Here’s the formula I use to quickly evaluate the rough returns for a covered call trade, applied to $250 strike calls expiring in 22 days.

I typically sell calls that expire within 1 to 4 weeks, but there is no real reason I chose the August 13 strike over the week before or after. This is just to show an example of a covered call trade.

Covered calls work best when you are familiar with the stock. Do you feel fairly confident that COIN won’t gain 9.87% over the next three weeks? If not, you can adjust this model and move up to the next strike.

I personally don’t own COIN, so I can’t give an exact trade that I would do here. If I had to say, I would select a call that’s 3 weeks out and fairly close to the money.

COIN is on a downswing since its IPO, and I am not confident at all that it will see a large rally in the next few weeks.

Coinbase since its IPO

Here’s the math on the $240 call:

Keep in mind that you typically want to sell calls just after a spike to maximize the short theta exposure you get. COIN is down today, so I would keep these options on my watchlist and wait for an IV spike to sell.

If I have to wait more than a couple days for that rally, I’d roll over to the next week’s option chain.