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Larry’s note: Welcome to Trading with Larry Benedict, the brand new free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’ve been featured in the book Market Wizards, alongside investors like Paul Tudor Jones. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… |
Yesterday, we took an up-close look at a completely different way to trade bitcoin…
Instead of trading the coin directly, we used a bought-option strategy to take advantage of a pullback in bitcoin. In particular, we traded the ProShares bitcoin Strategy ETF (BITO) – an exchange-traded fund (ETF) that uses futures to replicate the bitcoin price.
Today, I’m going to continue with the crypto theme by looking at another recent winner from my trading service, The Opportunistic Trader. This time, the focus of our trade was crypto miner Marathon Digital Holdings (MARA).
To be clear, the point of today’s piece isn’t to pat ourselves on the back. Because, at one point our MARA trade was going against us…
Instead, I want to highlight how a simple option strategy can help you achieve two things. First, it enables you to manage (limit) your risk. And in doing that, it sets you up to take advantage of any upside.
So, let’s get right into our trade…
By any measure, MARA has been on one heck of a ride over the past 12 months. Back in November 2020, MARA was barely trading for a couple of bucks. When it peaked last month, MARA was trading at $83.45 – an over 40-fold increase.
However, it’s MARA’s price action prior to this recent peak where our trade kicks off today. In the chart below you can see where we entered our trade…
Marathon Digital Holdings (MARA)
Source: eSignal
At the time of our entry, MARA was making lower highs each day (upper orange line) and had failed to break above its April high (A). After tracking into overbought territory, the Relative Strength Index (RSI) was also showing a change in momentum (lower orange line).
With the share price looking overcooked, we bought a put option on MARA. That’s because a put option increases in value when a share price falls.
As a quick reminder, we buy options because we know what our maximum loss (the premium paid) will be before we place our trade. And that makes managing our risk much more quantifiable…
From the moment we bought our put option, MARA rallied against us. From around $55, MARA went on to its high of over $83.
With the RSI showing MARA in overbought territory, and knowing that our risk was limited to the premium we paid for the option, we stuck to our guns and stayed with the trade.
If MARA kept rallying, and we chose not to close out our position, then we would’ve lost 100% of the premium we paid.
Compare this to simply shorting the shares directly… With losses accumulating daily (and much higher amounts of capital and margin required), there would’ve been no way we could’ve held onto this trade.
Then, when MARA did pull back strongly off its highs, we unloaded (sold) half of our put option for a 35% gain. That’s despite MARA trading close to the same level as when we entered the trade.
The reason we could sell our put option for this profit has to do with the volatility (price spike) you can see on the chart below…
Marathon Digital Holdings (MARA)
Source: eSignal
An increase in volatility increases the premium value of an option. That’s why our option increased in value, despite MARA trading around the same level as when we entered the trade.
When MARA fell further, we closed out the remainder of our position on December 3 for a 98% gain on the remaining part of our position.
However, that wasn’t the end of the trade.
Tune in tomorrow to find out exactly what we did next…
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
Have you traded any crypto mining stocks before? If so, what are some of your strategies?
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