Shopify (SHOP) has been in a solid uptrend for the past few months and if that trend continues, bull put spreads could do well.
Shopify provides a multi-tenant, cloud-based, multi-channel commerce platform for small and medium-sized businesses.
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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.
Today, we’re going to look at a bull put spread trade.
A bull put spread is a bullish trade that also can benefit from a drop in implied volatility.
The maximum profit for a bull put spread is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.
SHOP Bull Put Spread
Implied volatility is currently sitting at 71.82% which gives SHOP an IV Percentile of 82% and an IV Rank of 79.10%.
Shopify’s expected move between now and November 20th is around 13.17% in either direction. On the downside, that would put SHOP stock at around $146.04.
In other words, the options market is expecting SHOP stock to stay above $146.04 between now and November 20.
To create a bull put spread, we sell an out-of-the-money put and then by a put further out-of-the-money.
Selling the November 20th put with a strike price of $145 and buying the $140 put would create a bull put spread.
This spread was trading on Wednesday for around $1.00. That means a trader selling this spread would receive $100 in option premium and would have a maximum risk of $400.
That represents a potential 25% return on risk between now and November 20th if SHOP stock remains above $145.
If SHOP stock closes below $140 on the expiration date the trade loses the full $400.
The breakeven point for the bull put spread is $144 which is calculated as $145 less the $1.00 option premium per contract.
Shopify is due to report Q3 earnings on November 3rd, so this trade would have earnings risk if held to expiration.
Company Details
The Barchart Technical Opinion rating is a 100% Buy with a Strengthening short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
SHOP rates as a Strong Buy according to 35 analysts with 3 Moderate Buy ratings and 11 Hold ratings.
Conclusion And Risk Management
One way to set a stop loss for a bull put spread is based on the premium received. In this case, we received $100, so we could set a stop loss equal to the premium received, or a loss of around $100.
Another way to manage the trade is to set a point on the chart where the trade will be adjusted or closed. That could be around $150.
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 directly have a position 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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