So, by now everybody knows I love trading options to make money on stocks, but, the truth is, I've got lots of other interests that just so happen to be pretty lucrative.
I'm passionate about cannabis, for one thing, and as my Microcurrency Trader followers will tell you, I love to trade microcurrencies, too... especially the granddaddy of them all: Bitcoin.
So, just imagine how happy I was when my Money Calendar uncovered two companies - both with optionable stocks - that correlate with Bitcoin itself. It was almost like finding a whole new way to play Bitcoin, and, for me at least, have more fun doing it.
It's a real win-win... -win situation. You don't even have to own Bitcoin to be able to cash in here (though you'll make more profits)...
Yet Another Profitable Pattern Uncovered
If you talk to me for any length of time, you'll hear me say that I'm a "rules-based pattern trader." I'm "rules-based," meaning I set goals, expectations, and conditions - rules - for my trades, and I stick to 'em. For instance, I never get into a trade without an entry plan, a profit target, and an exit strategy while using strict money management and position-sizing criteria.
And I'm a "pattern trader" because I use my proprietary Money Calendar to crunch millions of data points to identify the repeatable, profitable patterns that appear in stock prices.
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(All that goes into every one of the research recommendations I make for my subscribers... and more than 70 of those have delivered double- and triple-digit gains this year.)
So it was really only a matter of time before I figured out how these stocks behave in relation to Bitcoin, but I'm still excited.
Now, you can find all kinds of correlations all over the markets, both positive and negative. Correlation is like the mother of all patterns, in fact.
Index exchange-traded funds (ETFs) like the good old SDPR S&P 500 ETF (NYSEArca: SPY) are carefully designed and managed to move with the S&P 500 index, but at about a tenth of the cost, so regular investors can have a way to play moves on the broader markets. Then there's the SPDR Gold ETF (NYSEArca: GLD), which follows the price of gold with extreme fidelity.
And of course you've got the inverse and leveraged inverse ETFs that are engineered to go up, sometimes by multiples, if the benchmark they follow goes down.
But those are specific products; most of the time, correlated assets don't necessarily have to move in 1:1 or -1:+1 lockstep, but they tend to move together because of market psychology or economic conditions.
A lot of the classic correlations - the ones your grandfather would have used in his investing - are negative.
Gold is a pretty good example: As uncertainty goes up, stocks go down, and money rotates out of stocks into the safe haven of gold, driving up the price. When the price of the dollar relative to other currencies goes up, the dollar price of gold goes down.
Bonds are another example, though the inverse correlation hasn't been all that strong since 2008; stocks go down, bonds go up. You can point to oil prices and airline stocks, too; as the price of oil goes up, it eats into airline profits, which eats into their stock prices.
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Stocks in the same industries usually correlate positively. If U.S. Steel Corp. (NYSE: X) has a good quarter, its sector "roommate" Nucor Corp. (NYSE: NUE) probably did, too. That's one of the reasons why the "Sector Spiders" from SPDR are so popular.
Sometimes the correlation isn't so obvious; it wasn't with these "Bitcoin stocks," but it's very real.
The first is PayPal Holdings Inc. (NASDAQ: PYPL), which recently started allowing users to use Bitcoin on its platform. You can't trade Bitcoin on PayPal, but you can use it on there, and PayPal will convert Bitcoin into fiat currency for you, too.
PayPal and Bitcoin have both moved up by triple digits since the March lows, in a 1:2 correlation, meaning Bitcoin has been driven up almost twice as much as PayPal has for most of the same reasons. What's more, some analysts I've read think that PayPal's adoption of Bitcoin could add, conservatively, at least another 20% to revenue in 2021.
Bitcoin and PayPal - I think everyone should own both, particularly after this year.
To trade what I think is going to be a monster year for both Bitcoin and PayPal, take a look at a call that's somewhat out of the money (OTM), like the PYPL Jan. 15, 2021 $220 call.
(That reminds me: Keep your eyes peeled for my 2021 Bitcoin price prediction; we're not quite finished with the research yet, but think "six figures" - that's all I can say right now.)
Square Inc. (NASDAQ: SQ) is another huge, nicely correlated Bitcoin stock that's actually done even better than Bitcoin has this year, thanks in large part to the widespread move to online shopping and "contactless" payments. Its adoption of Bitcoin is going to work a lot like PayPal's has.
Interestingly, I've read some credible reports that suggest PayPal and Square are the final destination for most of the Bitcoin that's being mined these days.
Square January calls aren't exactly cheap - their implied volatility (IV) is running in the low- to mid-50s, but I like the SQ Jan. 15, 2021 $220 calls to ride this higher, particularly since the next highest possible ceiling for Square is literally "off the charts" at $250.
If you play these two stocks, with or without Bitcoin holdings of your own, you'll get a taste of how profitable I think this coin is going to be going forward - and remember to watch for my forecast.
What can I say? I love trading and owning Bitcoin - and I expect I'll love it even more over the next year!
But the truth is, there's much more to microcurrencies - much, much more. You can go right here anytime to learn how to get all of my Microcurrency Trader research recommendations delivered right to your inbox.
About the Author
Tom Gentile, options trading specialist for Money Map Press, is widely known as America's No. 1 Pattern Trader thanks to his nearly 30 years of experience spotting lucrative patterns in options trading. Tom has taught over 300,000 traders his option trading secrets in a variety of settings, including seminars and workshops. He's also a bestselling author of eight books and training courses.