MARA Stock Short Straddle has no downside risk on Bitcoin Miner
Bitcoin volatility has again dried up as the world’s largest cryptocurrency trades in a tight range around $17,000. Bitcoin option premiums have dropped significantly, but volatility remains high for highly correlated bitcoin miners.
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By placing a short straddle on bitcoin miner Digital Marathon (MARA), investors have zero downside risk and can profit even if MARA stock nearly doubles at expiration.
A short straddle is an option strategy where an investor does not look up or down on shares at the start. Instead, the trader believes that the stock will move less in either direction than the market expects.
Short limit on MARA has no downside risk
With MARA stock trading around 5.20 per share on Friday, investors may consider placing a short limit by selling 5 calls and 5 puts at the January 2024 expiration. This trade can be placed for a credit of $5.15 per share, which also coincides with the maximum gain of $515 if the shares trade at 5 at expiration.
This trade has no downside risk and has a break-even point on the upside of 10.15.
The large profit area on the trade comes as the premiums for these options are extremely high. The volatility for the January 2024 options is 143%, which means that MARA stock moves 9% a day on average. Make no mistake Marathon Digital is a volatile stock that has realized 110% and 120% annualized volatility over the past 30 and 250 days, respectively.
However, it does not appear that this will continue. As the hype and influence surrounding cryptocurrencies has died down, so has the volatility. With the Fed pushing interest rates even higher, frenzied buying is unlikely to return anytime soon. This is a significant headwind for MARA stock, which directly benefits from higher cryptocurrency prices.
MARA Reduces Leverage as Crypto Uncertainty Bites
Operationally, Marathon Digital has done well to increase production. After record production in October, the company mined another 472 bitcoins in November. Amid sector uncertainty, the company announced on Wednesday that it had reduced revolving loans from $50 million to $30 million in November. If the company continues to deleverage, this could further support lower volatility.
Before placing any options, trading investors should be aware of the risks involved. The risk here is that the price of Bitcoin explodes again and the MARA share skyrockets.
With a low market value, inefficiencies can also arise, such as those that drove share prices to over 75 for a short time last year. To limit this risk, investors should close the trade if at any time double the original credit is lost.
MARA stock has a dismal IBD Composite Rating of 4 and is trading near 52-week lows after losing over 80% so far this year.
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