Shopify is set to report earnings on Wednesday before the opening bell and the options market is pricing in an 11% move in either direction. Today, we'll look at selling a cash-secured put on Shopify stock to take advantage of the high implied volatility that typically precedes earnings announcements.
A cash-secured put involves selling an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock.
Last week's trades were a mixed bag. A bull put spread on Nvidia and a diagonal put spread for Airbnb are doing well. But a bear put spread on Apple and a bear call spread on Applied Materials stopped out.
The Goal Of Shopify Stock Option Trade
The goal is to either have the put expire worthless and keep the premium, or to take assignment and acquire the stock. The good news is that you'd get Shopify well below the current price.
Cash-secured puts are very similar to a covered call and are quite easy to understand once you know the basics.
It's important that anyone selling puts understands that they may be assigned 100 shares at the strike price. That's why you have the money set aside just in case.
For Shopify, a trader selling the May 10 put with a strike price of 73 generates around $2.10 in premium per contract.
The put seller would have the obligation to purchase 100 shares of Shopify stock at 73 if called upon to do so by the put buyer. With Shopify trading around 77.40 this morning, there's quite a bit of room before you have to worry about assignment.
Managing The Trade
The maximum risk for the trade is $7,090. That's assuming you get assigned shares at 73 with an offset to that cost with the premium received. That's also how you calculate the break-even price at 70.90.
Basically, that's like acquiring the shares at an 8.4% discount below the price this morning around 77.40.
But what if the stock stays above 73 by expiration? The put option expires worthless and you keep the premium. Not a bad outcome considering it's a healthy 3% return on capital at risk in just a few days time. That works out to around 270% on an annualized basis.
The main risk with the trade is similar to outright stock ownership. If the stock falls significantly, the trade will suffer a loss, however the loss will be partially offset by the premium received for selling the put.
Cash secured puts are a fantastic way to generate a return on stocks the trader is happy to own.
With this example, the trader either generates a 3% return in a few days, or they get to purchase Shopify stock at a reasonable discount to the current price.
As an additional strategy, if Shopify trades below 73 and the put gets assigned, investors can then sell covered calls against the position to generate further income.
Shopify provides a cloud-based e-commerce platform for small and medium-size businesses. It has an outstanding 98 Earnings Per Share Rating and a 91 Composite Rating. It ranks No. 12 in the 124-stock Computer Software-Enterprise industry group.
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 X/Twitter at @OptiontradinIQ
