Shopify is dropping again after hitting resistance at the declining 50-day moving average. With growth stocks continuing to be out of favor, traders might consider a bearish trade known as a bear put spread.
A bear put spread is a debit spread, meaning that we need to pay the premium to open the trade.
If we place the bear put spread out of the money, we have a trade with low cost and a high reward potential if the stock drops.
On Shopify stock, a bear put spread could be set up using the 30 strike as the long put and the 25 strike as the short put for the September expiration.
Option Trade's Maximum Gain $315
This trade would cost around $185 per contract with a maximum potential gain of $315. Placing the trade further out of the money would create an even more favorable risk-to-reward scenario.
To achieve the maximum profit, this trade would need SHOP stock to drop 12.58% between now and expiration on Sept. 16.
The break-even point for the bear put spread is 28.15, which is calculated as 30 less the $1.85 option premium per share.
If Shopify stock drops early in the trade, it may be possible to make a profit at slightly higher prices.
Shopify Needs To Stay Below 30
At expiration, if SHOP stock is trading above 30, the entire spread would expire worthless, and the trade would lose 100%, or $185.
For a trade like this, I wouldn't bother with a stop loss. Either the trade works or it doesn't, so I would trade an appropriate position size in case I suffered the full 100% loss. Alternatively, you could set a stop loss at 50% of the premium paid.
Because this is a bearish position, traders that think Shopify stock could move higher from here should not enter this trade.
SHOP stock is ranked No. 40 in its industry group and has a Composite Rating of 28, and EPS Rating of 63 and a Relative Strength Rating of 4.
Trade Has Earnings Risk
Earnings are set for early August, so this trade would have earnings risk if held to expiry.
The VIX trade discussed June 15 has achieved almost a full profit and can be closed early.
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.
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
