Marathon Digital: Using High IV To Sell Broken Wing Butterflies (Technical Analysis)

Intro

It will be interesting to see how far Marathon Digital Holdings, Inc. (NASDAQ:MARA) can move in its present rally to the upside. As we see below, the cryptocurrency miner has rallied very aggressively out of its late December lows on very strong buying volume. In fact, the sharp-up move has resulted in a bullish trend-line break of the OBV indicator (On-Balance-Volume) which is noteworthy from a short-term standpoint. Why? Because buying volume for the most part precedes bullish share-price action in the financial markets. Suffice it to say, momentum to the upside in Marathon should be manifested initially in the volume trend and this is what we see playing out at present in the stock.

From a long-term perspective, however, the deteriorating gross profit margin (-53%) along with the bloated share count are worrying signs, to say the least. The reason being is that when positively generated cash flow has been absent for a considerable period of time, this brings a time element to proceedings. This means equity raises, asset sales, or debt drawdowns need to be consistently utilized in order to meet the shortfall in cash over time. Furthermore, although Marathon’s short-term trend has been bullish, it must be remembered that shares are down well over 50% over the past 12 months alone.

Suffice it to say, given the stock’s long-term bearish trend, Marathon Digital has some pretty heavy resistance above it including the pivotal 200-day moving average of approximately $10.37. In fact, the popular MACD histogram indicator may already be demonstrating that Marathon’s uptrend is weakening in strength. Therefore, how can we develop a trading/investing strategy where we believe Marathon may rally somewhat from its current level but still believe upside potential may be constrained?

Implied Volatility

Our first port of call is to go to Marathon Digital’s implied volatility. As we see from the chart below, implied volatility (156%+) is well above the 52-week mean for this stock, which equates to a 52-week IV rank of 61. Furthermore, the company’s option volume of 117,000 gives us an edge here with respect to selling Marathon’s options.

Furthermore, selling options of Marathon give us an edge because its historical volatility continues to trail the IV number as we see above. We state this because historical volatility is a calculated percentage of how volatile MARA shares have been in the past. Therefore, given that the expected move (implied volatility) is above this calculation, it means that MARA’s options are overpriced at present all things remaining equal (which benefits option sellers).

Therefore, what we put on recently is the regular March $11/$12.50 Broken Wing Butterfly (purchase of one $11 call for every two sales of the corresponding $12.50 call & the purchase of the $20 call) for a total credit of $0.37 per combo. As we see below, the price of the butterfly has already come down to $0.31 due to both IV and MARA’s share price declining in recent sessions.

However, what we want here is for MARA to rally up to our short strikes ($12.50) by expiration, where our maximum profit would be $187 per butterfly. The max-loss is in fact much higher due to how much that $20 strike is out of the money. However, this call serves a very important purpose, which is the following.

Short interest in MARA continues to rise (44%+) in a stock that is expected to grow its top-line sales by 250%+ ($436 million) next year. Suffice it to say, if growth revisions were to come in better than expected and if the short-interest ratio continues to expand, this would give rise to a prime short-squeeze scenario, especially if shares rally above overhead resistance. Therefore, the $20 call is crucial as it defines our risk in this setup, which is important if the above were to take place.

Conclusion

Marathon Digital Holdings has started the year off very well with strong buying volume. Furthermore, the up move has spiked implied volatility well above its 52-week mean, with calls continuing to trade richer than puts. Our broken wing butterfly setup wants MARA to continue rallying but not above our $12.50 short strikes. Let’s see what unfolds. We look forward to continued coverage.