The cryptocurrency craze continues to defy both skeptics and sanity alike over the past months. And shares of bitcoin surrogates such as Overstock.com Inc (NASDAQ:OSTK) have seen a similarly unreal rally in their shares. While no one truly knows the long-term future of bitcoin, or their highly correlated surrogate stocks, one can look at the recent parabolic run up and argue that, for the short term at least, the run may be overdone.
The Chicago Board Options Exchange (CBOE) launched bitcoin futures last Sunday night, with bitcoin futures rallying nearly 20% in just the first day of trading. Part of this was due to the fact that brokers were not allowing traders to take short positions in bitcoin futures due to the enormous risk. Interactive Brokers (one of the biggest brokers), however, will now allow shorting of bitcoin futures. This certainly will add some upside headwinds to the parabolic move.
Click to Enlarge While bitcoin has been on an unbelievable run, OSTK has actually outperformed it during that time period. Now that bitcoin is showing some signs of leveling off, I look for Overstock to follow a similar path and consolidate over the coming weeks.
Since making an intraday low of $14.30 following a disappointing earnings report on August 4, shares of OSTK rallied an astounding 359% to the intraday high of $65.70 before coming back to earth. Expect that high to be formidable resistance in the next month. The price action yesterday, with shares opening higher and closing lower on the day, also smacks of a reversal day. This indicates the buyers may finally be exhausted.
Click to Enlarge Implied volatility (IV) is at extremes, given the volatility of both bitcoin and OSTK, with levels over 100. this means options prices are super expensive, favoring selling strategies. While shorting bitcoin futures or OSTK stock is difficult and risky, the options market provides a more sensible and safer answer to take a defined risk short position with plenty of room to be wrong. An out-of-the-money bear call spread is just such a way.
OSTK Stock Trade Idea
Buy OSTK Jan $70 calls and sell OSTK Jan $65 calls for a 60-cent net credit.
Maximum gain on the trade is $60 per spread with maximum risk of $440 per spread. Return on risk is 13.63%. The short $65 strike is positioned near the recent high of $65.70 and provides a 21.63% upside cushion to the $53.44 closing price of OSTK.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com.
