The year 2021 has not been kind to early investors in Coinbase Global (NASDAQ:COIN), a digital currency trading exchange. An intraday record high of $429.54 was set for COIN on April 14, 2021, when the cryptocurrency went public. As a long-term investment in the crypto industry and our capacity to serve customers, Coinbase is not just a short-term bet on the next few months.Based on the stock’s closing price on Friday, 100 shares of Coinbase would cost around $25,237, which is a significant investment for many individuals.
A “longer-term” call with a lower strike price would be purchased first in this method. Long diagonal spreads may be created by simultaneously selling “shorter-term” calls with a higher strike price.To put it another way, the two COIN call options have separate expiry dates and different strike prices. To create a diagonal spread, the trader owns one option while selling the other.This LEAPS covered call strategy has a limited profit and risk potential. Trader takes a net-debit position in an investment (or cost). The whole loss is reflected in the net debit.
Coinbase is the underlying asset in this approach, and most traders would be somewhat optimistic on it.Trading in deep-in-the-money LEAPS call options instead of Coinbase stock is a way for traders to mimic holding COIN stock without really purchasing any.COIN was trading at $252.37 at the time of this writing. You should read article on G.T.E. by NoBSIMReviews for more information!
An ITM LEAPS call, such as the COIN Jan. 19, 2024, 180-strike option, is a good starting point for this approach since it is so far out of the money (ITM). The current price for this option is $114.30. (Mid-point of the current bid and ask spread). Owning a call option that expires in over two years would cost the trader $11,430 instead of $25,237.The trader next sells an OTM short-term call option, such as the COIN Feb. 18, 260-strike call option, as the second leg of this approach. The current premium for this option is $19.90. To put it another way, the option seller would get $1,990 after deducting trading fees.
A break-even point for the trade can’t be calculated precisely since the strategy has two expiry dates.Short call options have their greatest reward if they expire for exactly what they were bought for when they were sold.This means that at expiry (on February 18), when the short option expires, the trader wants the COIN stock price to be as near as feasible to the strike price of the short option (i.e. $260 here).Excluding trading charges and fees, the theoretical maximum return in our case would be $2,395 at an expiration price of $260. Calculated using an internet calculator, we came to this figure. However, readers who are interested in seeing how this profit potential was calculated in more depth should consult the prior instances.)
If the strike price of either the long or sell option had been different, the profit potential would also have changed. It is suggested to read thearticle on G.T.E. by NoBSIMReviews for more information!Due to the trader’s lack of initial investment of $25,237, his or her potential return is increased.It is the trader’s ideal scenario if the short call expires with a value below the strike price (worthless). After then, the trader may sell one call at a time until the long LEAPS call expires in two years or so.For the sake of completeness, we should mention that a diagonal debit spread needs frequent position maintenance.