Cryptocurrency exchange Coinbase Global (NASDAQ:) on April 14 via direct listing. Unlike a standard IPO, a company that completes a direct listing does not issue new shares or raise additional capital. Instead, it opens the sale of its shares directly to the public.
COIN started trading at $381 and reached a record high of $429.54 on the first day it went public. Since then, however, there has been a downward trend. On May 19, the COIN stock hit an all-time low of $208. Now, as we write Tuesday afternoon, the shares are hovering at $236.
Despite the drop in share price over the past two months, The Street agrees that the digital platform has significant potential. In fact, given the interest and volatility in the price of cryptos, Coinbase has become one of the most followed stocks on Wall Street. Some investors may also consider COIN as a proxy for holding digital currencies such as or, as well as other altcoins.
Therefore, potential investors may consider buying the shares for their growth portfolio. However, investing in 100 shares of COIN stock would cost about $23,600, a significant investment for many people.
Some investors may prefer to place a "poor person's covered call" on the stock instead. So today we are introducing a diagonal debit spread on Coinbase Global using LEAPS options. Such a strategy is sometimes used to replicate a covered call position at a significantly lower cost.
Investors new to options may want to read our previous articles on LEAPS options (e.g. here and here) before reading further.
Coinbase Global Weekly Chart.
A diagonal debit spread on COIN Stock ] $208.00 – $429.54
A trader first buys a “longer term” call with a lower strike price. At the same time, the trader sells a “shorter term” call with a higher strike price, creating a long diagonal spread.
The call options for the underlying stocks therefore have different strikes and different expiration dates. The trader goes long one option and short the other to create a diagonal spread.
In this strategy, both the profit potential and the risk are limited. The trader determines the position for a net depreciation (or expense). The net depreciation represents the maximum loss.
Most traders adopting such a strategy would be slightly optimistic about the underlying security – here Coinbase Global. Instead of buying 100 COIN shares, the trader would buy a deep-in-the-money LEAPS call option, with that LEAPS call acting as “surrogate” for holding the COIN shares .
As we write Tuesday afternoon, the COIN stock is $235.98. That is why we use this price for this message.
For the first leg of this strategy, the trader could buy a deep in-the-money (ITM) LEAPS call, such as the COIN January 20, 2023 170 strike call option. This option is currently offered for $100.85. It would cost the trader $10,085 to own this call option which expires in about a year and a half instead of $23,598 to buy the 100 shares outright.
The delta of this option is close to 80. Delta shows the amount that the price of an option is expected to move based on a $1 change in the underlying asset.
If Coinbase Global shares rise $1 to $236.98, the current $100.85 option price would be expected to rise about 80 cents, based on a delta of 80. However, the actual change could be slightly more or less, depending on several other factors beyond the scope of this article.
So the delta of an option increases as one goes deeper into the money. Traders would use deep ITM LEAPS attacks because as the delta approaches 1, a LEAPS option's price movements begin to mirror those of the underlying stock. In simple terms, a delta of 80 would be the same as owning 80 COIN shares in this example (as opposed to 100 in a regular covered call).
For the second part of this strategy, the trader sells an out-of-the-money (OTM) short-term call, such as the COIN August 20, 2021, 250 strike call option. The current premium of this option ' is $15.95. The options seller would receive $1,595 excluding trading commissions.
There are two expiration dates in the strategy, making it quite difficult to give an exact formula for a breakeven point in this trade. Several brokers may offer "profit and loss calculators" for such a trading setup. To calculate the value of the back-month (i.e. LEAPS call) when the first-month (i.e. the shorter date) call option expires, a pricing model is needed to get a “ estimate” for a break-even point.
Maximum Earning Potential
Maximum potential is realized when the stock price is equal to the strike price of the short call at maturity. So the trader wants the COIN stock price to stay as close as possible to the strike price of the short option (i.e. $250 here) on expiration (on August 20, 2021), without going above it.
Here the maximum return would theoretically be about $2,641 at a price of $250.0 at expiration, excluding trading commissions and fees. (We arrived at this value using an options profit and loss calculator). Without the use of such a calculator, we could also arrive at an estimated dollar value. Let' take a look:
The option seller (i.e. the trader) received $1,595 for the option sold. Meanwhile, the underlying COIN share rose from $235.98 to $250. This is a difference of $14.02 per COIN share, or $1,402 for 100 shares.
Since the delta of the long LEAPS option is taken 80, the value of the long option will theoretically increase by $1,402 X 0.8 = $1,121.60 (however, in practice it could be more or less than this value. )
The total of $1,595 and $1,121.60 comes to $2,716.60. Although it is not the same as $2,641, we can consider it a good estimated value.
Understandably, if our long option's strike price had been different (i.e. not $170.00), the delta would have been different as well. Then we have to use that delta value to arrive at the estimated final profit or loss value.
Here, by not investing $23,598 in 100 COIN shares initially, the potential returns of the trader are exploited.
Ideally, the trader hopes that the short call will expire out-of-the-money. Then the trader can sell call after call, until the long LEAPS call expires in about a year and a half.
Position management
Active position management in a diagonal debit spread is usually more difficult for novice traders .
If COIN is above $250 on August 20, the position will return less than its potential maximum return, as the short-term option begins to lose money.
Then the trader may feel the need to close the trade early as the price skyrockets and the short call is caught deep in the ITM.
On a regular covered call, the trader wouldn't necessarily mind getting the short option as he/she also owns 100 COIN shares.
However, in a poor person's covered call the trader wouldn't necessarily want to get the short call since he/she doesn't actually own those COIN shares yet.
On August 20, this LEAPS-covered call trade would, in theory, also start losing money if the COIN stock price falls to about $219 or below. Understandably, a stock's price can drop to $0, decreasing the value of the long call.
In the coming weeks we will continue our discussion with several examples of option strategies.
