After a couple of bullish years in the markets, investors might be more interested in generating income rather than capital gains.
Today, we’re looking at two covered call examples on Shopify (SHOP) stock. The first step to finding our covered call candidates is to use the Stock Scanner with the following parameters:
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Which produces the following results:
Shopify (SHOP) is a strong looking stock and could be a good candidate for a covered call trade.
SHOP does not pay a dividend, but using options, we can generate income via a covered call strategy.
SHOP Covered Call Example
Let’s look at two different covered call examples on SHOP stock. The first will use the October expiration and the second will use a January expiration.
Let’s evaluate the first SHOP covered call example.
Buying 100 shares of SHOP would cost around $14,826. The October 16th, 160 strike call option was trading yesterday around $2.85, generating $285in premium per contract for covered call sellers.
Selling the call option generates an income of 2.0% in 174 days, equalling around 42.1% annualized. That assumes the stock stays exactly where it is. What if the stock rises above the strike price of 160?
If SHOP closes above 160 on the expiration date, the shares will be called away at 160, leaving the trader with a total profit of $1459 (gain on the shares plus the $285 option premium received). That equates to a 10.0% return, which is 215.4% on an annualized basis.
Instead of the October 16 call, let’s look at selling the January 160-strike call instead.
Selling the January 15th, 160-strike call option for $13.25 generates an income of 9.8% in 108 days, equalling around 33.2 % annualized.
If SHOP closes above 160 on the expiration date, the shares will be called away at 160, leaving the trader with a total profit of $2499 (gain on the shares plus the $1,325 option premium received).
That equates to an 18.5% return, which is 33.2% on an annualized basis.
Of course, the risk with the trade is that the SHOP might drop, which could wipe out any gains made from selling the call.
Also, any gains above 160 are foregone.
Barchart Technical Opinion
The Barchart Technical Opinion rating is a 64% Buy with a Strengthening short term outlook on maintaining the current direction.
Implied volatility is at 61.66% compared to a 12-month low of 40.11% and a 12-month high of 80.20%.
The next earnings release is set for November 3rd.
The current analysts ratings are shown below:
Company Description
Shopify Inc. provides a multi-tenant, cloud-based, multi-channel commerce platform for small and medium-sized businesses.
Merchants use the company's software to run business across various sales channels, including web and mobile storefronts, physical retail locations, social media storefronts, and marketplaces.
Shopify's platform enables merchants to manage products and inventory, process orders and payments, ship orders, build customer relationships and leverage analytics along with reporting from one integrated back office.
Moreover, Shopify hosts a huge database of merchant and customer interactions.
Merchants leverage this transactional dataset to get meaningful insight into the sales channel growth prospects and consumer behavioral aspects.
This improves their ability to target prospective customers more easily, which drives sales growth.
Covered calls can be a great way to generate some extra income from your core portfolio holdings.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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