Shopify put in a bullish candle Wednesday, rising over 5% and crossing back above the 50-day moving average. Shopify stock could be headed for a test of the early February high of 55.
A cheap way to gain some upside exposure using options is via a bullish calendar spread.
Volatility in SHOP stock is quite low at the moment, which is why I would favor a calendar spread over a credit spread.
A calendar spread is a trade that involves selling a short-term option and buying a longer-term option with the same strike price.
With Shopify stock trading around 47, a bullish calendar spread might be placed at 55.
Selling the May 19, 55-strike call option will generate around $150 in premium. Buying the July 21, 55 call will cost around $300.
Maximum Profit About $365
That results in a net cost for the trade of $150 per spread, and that is the most the trade can lose.
The estimated maximum profit is around $365 but that could vary depending on changes in implied volatility.
The idea with the trade is that if SHOP stock trades up to around 55, the calendar spread will increase resulting in a net profit.
The break-even prices for the trade are around 46 and 67.
The position starts with a delta of 10, meaning the exposure is roughly equivalent to being long 10 shares of SHOP stock. But this will change as the trade progresses.
When To Close Calendar Spread
I would close this bullish calendar spread if Shopify stock rallied to 55, or if it dropped below 46.
According to the IBD Stock Checkup, Shopify stock is ranked No. 26 in its group and has a Composite Rating of 79, an EPS Rating of 54 and a Relative Strength Rating of 93.
Check out IBD's new OptionsTrader app for options education, trade ideas and more! Download from the Apple App Store today.
It's important to 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.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ.
