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$Circle(CRCL.US)$ Since its listing this year, it has attracted significant attention, and the recent substantial correction has sparked further discussion, similar to the situation with CoreWeave. Let us first examine its stock price performance.

PS. Regarding $CoreWeave(CRWV.US)$ There is also another analytical article available for viewing.After a significant correction, how should the highly watched CoreWeave options be approached?View.

What a rollercoaster ride this stock price is!

$Circle(CRCL.US)$ It debuted on the New York Stock Exchange on June 5 at an issuance price of $31, closing its first day at $83.23, an increase of 122.58% from the issuance price, with an intraday high reaching $103.75, triggering a circuit breaker. Just 18 days after its listing, the stock price soared to a historical high of $298, nearly a tenfold increase from the issuance price, with a market capitalization exceeding $60 billion, being regarded as the "first stock of stablecoins."

The driving factors at this stage primarily include market expectations regarding the passage of the GENIUS Act, the USDC circulation exceeding 61.3 billion USD, and the surge in trading volume in the cryptocurrency market leading to increased demand for stablecoin usage.

However, it subsequently experienced a significant pullback due to multiple bearish factors. These factors include market concerns that a Federal Reserve interest rate cut would sharply reduce Circle's interest income, worries about the high distribution costs it would have to pay to exchanges like Coinbase, and the introduction of global regulatory new rules such as the stablecoin regulations in Hong Kong, which pose competitive pressure. Even after the earnings release, although the revenue was considerable, the extent of the losses exceeded market expectations, leading to concerns about its profitability sustainability. Furthermore, the issuance of 1.3 billion USD in additional shares in mid-August further pressured the stock price.

As of the close of the U.S. stock market on August 19, Circle's stock price was 135.23 USD, which is more than half lower than its peak.

One cannot help but marvel at how the market's fluctuations are vividly illustrated in this stock, with risks and opportunities intertwined. Regardless of the past, what matters more is looking forward and finding ways to leverage volatility to our advantage!

Let us now examine the upcoming risks and opportunities for this stock, as well as how to use options to mitigate risks and seize opportunities.

*The following data is as of the market close on August 19.

Is Circle a risk or an opportunity?

$Circle(CRCL.US)$ This company relies almost entirely (97%) on using the funds deposited by users in exchange for the stablecoin USDC to purchase U.S. Treasury bonds to earn interest.

Therefore, the Federal Reserve's interest rate cuts have a significant impact on it. According to estimates by Goldman Sachs, each 25 basis point cut results in a 5.5% decrease in revenue and a more drastic reduction of 10.5% in profits. A troubling aspect is that 61% of the interest will be shared with partners like Coinbase. Furthermore, the competition in the stablecoin market is fierce, struggling against the market leader Tether, along with various new stablecoins and tokenized funds vying for market share.

Life is not particularly easy, but opportunities do exist. If the cryptocurrency market heats up, leading to increased transactions and higher usage of USDC, although the interest per transaction is lower, it could still compensate through volume. Recently, Circle has minted a significant amount of USDC on the Solana blockchain, which essentially validates its fundamental prospects on the blockchain.

Additionally, the cross-border payment sector is substantial. If its CPN network can be successfully established, it could provide an additional revenue stream. Moreover, its compliance is well-executed, serving as a compliance model, which is a considerable advantage in a global regulatory environment that is stringent. For instance, in places where local currencies are depreciating rapidly, there may be significant demand for reliable dollar substitutes like USDC.

However, from a valuation perspective, the current valuation is already significantly inflated, with a price-to-sales ratio of 14.72 and a price-to-book ratio of 13.15, both considerably above the industry average.

In terms of technical indicators: the 5-day moving average (143.692) and the 10-day moving average (151.651) are in a bearish arrangement, and the stock price is below the moving averages, indicating a bearish short-term trend. The MACD histogram has been contracting since August 11, with both the DIF and DEA in negative territory, though the two lines are gradually converging, suggesting that the downward momentum may be weakening, yet a clear reversal signal has not yet formed. The RSI and KDJ have entered the oversold zone (the former below 30, the latter below 20). Overall, the trend to stop the decline has not yet been fully established.

In terms of options, pay attention to implied volatility (IV), the put/call ratio, and option anomalies.

The IV is at 78.44%, with the IV percentile below 5%. Recent IV has notably decreased, yet it remains higher than many technology stocks, providing certain advantages for options sellers.

On August 19, the put/call volume ratio was 1.98 (with put volume of 98,000 contracts vs. call volume of 49,500 contracts), indicating that this ratio has been higher than in the previous period, reflecting an increase in bearish sentiment.

In terms of options activity, there is a noticeable bias towards large short positions recently. Notably, the Call options with a strike price of $170 and the Put options with strike prices between $100 and $110 are supported by significant sentiment.

At this juncture, what kind of options strategy is appropriate? There is not a singular strategy at this time.

Before the interest rate cut in September and the evident turning point in cross-border payment business, the upward drivers or downward risk factors for Circle may be in a consolidation phase. Additionally, the current implied volatility (IV) is not low, which somewhat favors sellers. In this context, some investors may choose to execute a Short Strangle strategy to collect premiums as long as the stock price does not breach either strike price.

Furthermore, some investors exhibit a clear inclination towards either a continued decline or stabilization after a drop, and may opt to sell single options, engaging in Short Put strategies to sell Put options or Short Call strategies to sell Call options.

Alternatively, they might bet on long-term bullish realizations by executing Long Call to buy Call options or a Bull Call Spread at a lower cost to favor cross-strike Call options, among others. Or, they might preemptively bet on the impact of rate cuts by executing Long Put to buy Put options or a Bear Put Spread at a lower cost to favor cross-strike Put options, etc.

Example of Circle options operations: executing a Short Strangle strategy.

*The following content is for educational purposes only and does not constitute investment advice.

1. Premise: Believing$Circle(CRCL.US)$ Currently in a dilemma of fluctuations, it is anticipated that the stock price will not break through a certain range for a period of time.

2. Strategy: Sell Put + Sell Call, with the expiration dates and contract quantities of the Call and Put being exactly the same, but the strike price of the Put being less than that of the Call; both options are out of the money (OTM), meaning the Put strike price < stock price < Call strike price.

3. How to choose the strike price and expiration date?

Choose a strike price that you believe will not be breached either upwards or downwards; the strike prices of significant options movements may also provide some insights, for example, a Put with a strike price of $100 and a Call with a strike price of $170.

As for the choice of expiration date: because Circle itself is a highly volatile stock, although the probability of it trading sideways is greater, selecting a date that is too close increases the risk of being exercised. However, if the date is chosen too far in the future, it will occupy margin for a longer period, resulting in a lower capital utilization rate, which could affect the overall return on investment. Given this background, it would be advisable to consider a date that is neither too close nor too far, such as approximately one month later.

However, it is still important to pay attention to the timing of the Federal Reserve's interest rate meeting, which will be held from September 16 to 17; options that expire before this date may be better positioned to avoid volatility risks associated with interest rate changes.

4. What are the costs and benefits?

Taking "selling 1 Put with a strike price of $100 expiring on 250912 + selling 1 Call with a strike price of $170 expiring on 250912" as an example.

Based on the closing price on August 19, the initial net income from this transaction is $287, with a required margin of approximately $8,500.

1) If the stock price does not fall below $100 or exceed $170 by September 12, your profit will be maximized; after deducting the transaction fee of $5.04, the profit is $287 - $5.04 = $281.96.

2) If the stock price continues to decline before expiration, and there is a risk of falling below $100 or exceeding $170, it may be prudent to consider buying to close the position in order to prevent further losses.

For example, using the current parameters and the mooer's options calculator: suppose the stock price drops to $105 on September 1, under unchanged conditions, the price of the sold Put would change to $4.0919, while the sold Call price would be nearly zero.

If a stop-loss is triggered at this point, the loss would be approximately $409 - $281.96 - $5.04 - $2.51 = $119.49, where the last two numbers on the left side of the equation represent the transaction fees for opening and closing the position, respectively. Of course, actual prices may deviate from calculated prices, and implied volatility and other parameters are not constant in reality.

3) What if, as the expiration date approaches, you have not had the chance to close the position and the risk of being exercised is significant?

At this point, if closing the position would result in a significant loss, another approach is to roll over or transfer the position, which involves closing the current position while simultaneously selling a Put with a lower strike price and a later expiration date, or a Call with a higher strike price and a later expiration date. This can yield an amount similar to the costs of closing the position, while shifting the risk to a later date.

4) If by the expiration date you have not had the chance to close the position, and have not rolled over, and the price has dropped below $100 or exceeded $170, what should you do if you are exercised? After being exercised, if you hold the underlying stock, you may consider selling one Call above the stock's purchase price to increase cash income, or buying one Put below to hedge against further declines, or you may do both simultaneously.

Therefore, you will find that the operation of options is a chain of interconnected steps, rather than a single decision that determines success or failure; there is still considerable room for flexible operations.

5. Finally, a reminder to manage risk appropriately!

Pay attention to position size; the capital allocated to this trade should not be too high, ideally not exceeding 20% of the account's net assets. If your trading results in nearly no net assets in the account, you will face the additional risk of a margin call, at which point your subsequent operations with the options may no longer be under your control. You can adhere to the principle of 'better to sell one less set than to add margin.'

Set appropriate profit-taking and stop-loss levels. Sometimes, in order to capture all potential income, it may require taking on greater risks; therefore, after achieving a certain level of unrealized profits, you can consider taking profits (for example, when options premiums have appreciated by 60%-80%). Conversely, if you hold on due to reluctance after incurring losses, you might ultimately face even greater losses. Thus, it is advisable to set a stop-loss line for yourself (for example, when losses reach 50% of the premium income).

Additionally, if you are concerned about the potentially high maximum loss from selling options on both sides, you might consider simultaneously buying an option on each side, for instance, purchasing one Put option with a strike price of $90 and one Call option with a strike price of $180. Although the initial income will be lower, it caps the maximum loss.

In reality, there is no single optimal strategy for options; rather, there are strategies that are better suited to one's investment goals, risk tolerance, and market expectations. Under the high volatility of Circle, understanding how to better utilize options to transform volatility into opportunities is a significant skill.

Alright, that's all for today. If you have any thoughts or suggestions regarding Circle's options strategy, please feel free to leave a comment!

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