It’s hard to read a ticker tape without seeing something related to bitcoin in it. Riot Blockchain Inc (NASDAQ:RIOT) is trying to capitalize on this by committing to profiting from this financial technology. Fintech is a buzzword that investors often use to describe the blockchain idea of currency interchange. Bitcoin is one of those currencies. I bet that this last sentence is subject to a long debate but I digress.
Today I am not writing about if bitcoin is viable or not. I am merely betting that I can generate income from the popularity of the tech that is blockchain through using RIOT. Unlike a lot of crypto trading vehicles, RIOT has options which makes it much easier for me to participate.
I consider today’s trade a highly speculative bet in a conservative portfolio. It’s my way of scratching the crypto itch with relatively limited risk. I could buy RIOT stock and risk $32 at face value and without any room for error. This is not an attractive idea since we’ve seen it move too violently. So it’s would be more like gambling than investing.
Instead, I will sell puts into recent short-term support. If I am right then I would generate income out of thin air. If I am wrong I could own RIOT stock but at a discount from here. Usually I sell risk into value but this trade is special.
I could not show value in RIOT stock from the traditional sense. However, I could argue that there is intangible value stemming from the popularity of crypto-currencies. Bitcoin has established itself as an asset to enough investors that its value spills over into RIOT.
I know that there are critics of the technology and they make smart arguments against but for now I believe that this train is too fast so it has momentum. Traders will buy the dips and therein lies my opportunity. That’s what I will use in lieu of value.
Love it or hate it, bitcoin is here to stay for now; and therein lies an opportunity to generate income from RIOT out of thin air.
The Bet: Sell Jan 5 $22 puts and collect $1.25 to open. This is a bullish trade which has an 85% theoretical chance of success. But if price falls below my strike I would accrue losses below $20.75.
Selling naked puts carries big risk especially in a violent stock like RIOT. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell the Jan 5 $22/$21 credit put spread where I have about the same odds of winning but with smaller risk. Yet, if it wins, the spread delivers 15% in yield.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get my newsletter for free here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.