Trading the Boom In Cryptocurrencies With Options

High Volatility, Options, Technology Stocks

Many people have become instant millionaires from trading these obscure assets, but how can you make money off of the cryptocurrency boom even if you don’t know the first thing about trading them? With options of course. Here’s a unique trade that should appeal to every investor looking for yield.

By now, just about everyone has heard of Bitcoin.  The digital currency has taken the world by storm over the last several years, at least for those who want to invest in a currency not associated with a particular government or central bank.  And it’s not just Bitcoin, hundreds of digital currencies, also called cryptocurrencies, have sprung up recently with a total market cap of more than $100 billion.

You see, digital currencies can generally be “mined” (accumulated) by anyone with enough computer processing power to do so.  The do-it-yourself nature of generating the currencies has certainly helped lead to the massive popularity of the product.  However, there are only a handful of cryptocurrencies getting most of the action.

In fact, $75 billion of cryptocurrency market cap is concentrated in two digital currencies, Bitcoin and fast-rising Ethereum.  As of this past week, Bitcoin had a market cap of just under $44 billion with 1 unit the equivalent of around $2,700.  Meanwhile, Ethereum (up several thousand percent this year) has reached a market cap of $30 billion, and one Ether was worth about $330.

Without getting into the details, because it can be overly complicated, in exchange for using your own computer(s) to help verify and validate cryptocurrency transactions worldwide, you earn payment in whatever digital currency is being mined.  As I said, the details aren’t important, as long as you understand that the key to mining digital currencies is having sufficient computing power.

Why cryptocurrencies have become such a driving force, and whether or not the whole thing is one big bubble are topics for a different time.  It remains to be seen what kind of staying power digital currencies will have, and the answer will at least be partly due to how easily they can be spent/exchanged for physical money or goods.

However, there certainly is an appeal to decentralized currencies, which is why gold has remained a valuable commodity for over 5,000 years.  But unlike gold, cryptocurrencies can be accumulated by anyone willing to do the research and invest in the computing hardware.

And that’s where the trading opportunity comes in…

I don’t recommend trading currencies directly, as they can be highly volatile.  And, there aren’t any cryptocurrency ETFs listed on major exchanges (although that will probably change in the near future).  Of course, you can try to figure out how to mine the currencies themselves – something which has become increasingly popular in Asia – but you need to have a fair amount of technical savvy to do so.

So how else can you trade digital currencies using assets on major exchanges (including options)?

Well, as I said earlier, mining cryptocurrencies is all about computing power, particularly processing power.  In fact, one of the best ways to mine currencies is by using high-end GPUs (graphics processing units).  GPUs are the modern incarnation of what we used to call graphics cards.  They are the processing units which render images and video – and they are an integral part of modern computing.

GPUs have become so powerful at processing data, they have become the go-to method for mining digital currencies.  This has in turn given a boost to the two biggest players in the industry, Nvidia (NASDAQ: NVDA) and Advanced Micro Devices (NASDAQ: AMD).

Both companies have value as cryptocurrency investments.  AMD, at just $14 per share, is certainly the cheaper play.  However, I’m going to focus on a trade in NVDA (around $158) because I think it’s the better company right now.  Certainly, in terms of the massive (and growing) video game industry, NVDA is the stronger play.

As I normally do, I’m going to recommend a two-sided options trade in NVDA.  By that I mean a trade which can make money if the stock moves (a fair amount) in either direction.  I’m definitely more bullish on NVDA than bearish, but with how volatile the cryptocurrency market can be, I don’t want to take any chances.

As such, I’m going to recommend an unbalanced strangle in NVDA options.  Basically, I’m suggesting you buy a higher probability call (closer to the stock price) and buy the put farther away.  In this way, you’re more likely to make money on the upside, but if the stock plunges, you can still earn substantial profits.

One way to do this by purchasing the July 21st 140-170 strangle for $3.75.  That gives you a month for the stock to hit the breakeven points of roughly $136 or $174.  It’s unbalanced in favor of calls as the breakeven for calls is $16 higher than the stock price, while the breakeven for puts is $22 lower.

Yes, $375 is a bit expensive for such a relatively wide strangle.  However, NVDA can be a very volatile stock, and the options are actually cheap on a historical basis.  While this trade isn’t necessarily for the faint of heart, it definitely has plenty of upside potential.  Plus, it’s one of the few ways you can trade cryptocurrencies without trading the currencies themselves.