The bearish argument for Riot Blockchain (NASDAQ:RIOT) is becoming too powerful to ignore. RIOT stock is 66% off its peak as of Wednesday’s close and is tumbling further in after-hours trading.
If you’re tempted to go dumpster diving here – don’t. I’ll lay out my rationale below.
Afterward, if you still feel like bottom fishing, use options to enhance your probability. The premiums available in both calls and puts are sky high and make it easy to tilt what I believe to be low odds, at least a little higher.
You’ll reduce your potential profit in doing so, but it’s a necessary sacrifice in exchange for increasing the likelihood that you come away from the venture with a respectable profit.
Bitcoin’s Price Correlation Falters
RIOT stock rode Bitcoin’s (CCC:BTC-USD) coattails for months. For one reason or another, market participants began using the shares as a proxy for bitcoin exposure, particularly during the post-November explosion that saw the digital asset’s price balloon to over $65,000.
Unfortunately, what started as a strong relationship between the two has weakened considerably. This month, the correlation even turned negative, with Riot Blockchain moving in the opposite direction of bitcoin.
As an aside, this illustrates the danger of using a derivative product for roundabout exposure to an asset. It’s always best to seek pure exposure to ensure you get whatever the investment ends up giving. And it’s not as if acquiring bitcoin requires above-average intelligence or a massive bankroll. There are countless avenues to acquire exposure with even tiny dollar amounts.
Another way to illustrate the diverging price paths is to spotlight how far both vehicles have fallen from their peaks. As mentioned in the lead-in, Riot is 66% off its highs. At the same time, bitcoin is only down 17%.
Here’s a key takeaway. Riot has stopped getting much of a boost when bitcoin ramps, but it still gets beaten down when the cryptocurrency slides.
For instance, on Wednesday, bitcoin futures fell as much as 13% in the evening session. As for Riot stock – it’s down 16%.
RIOT Stock Chart
Set the correlation drama aside for a second and consider the price chart. Short of saying the stock is getting oversold, which is the weakest bullish argument on the planet, there’s nothing nice to say about the stock’s prospects. The trend is lower, and momentum heavily favors sellers. The stock was at $60 a month ago, and it was flirting with $22 after hours.
Even if a bounce were to emerge in the next few days, it wouldn’t change anything about the trend structure. This year, $35 was a major support zone and now that’s it’s broken, there’s a heap of overhead supply threatening to stymie any advances. Until a more substantial bottoming pattern forms and a bona fide trend reversal forms, I suggest steering clear of any bullish trades.
But if You Must …
If the messy correlation and even messier price chart doesn’t convince you to pass on bottom fishing here, then at least sell out-of-the-money calls against your stock purchase to reduce your cost.
Or, even more conservative, sell an out-of-the-money put to get paid for your willingness to buy shares. If the overnight plunge persists into Thursday morning, you should be able to sell puts with a strike in the low teens for a pretty penny. I’d wait for signs that the stock is pivoting higher first before pulling the trigger, though.
The Trade: Sell the June $13 put for at least 60 cents.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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