Shopify Inc (US) (NASDAQ:SHOP) has come under intense scrutiny of late after Citron Research issued a scathing bearish report. I am both skeptical of and thankful for big name short sellers. I’m skeptical because once these short sellers announce their large positions to the financial media, the stock in question almost always plunges sharply.
Would the stock have plunged on its own without this news? Or is the announcement of the large short position a self-fulfilling prophecy?
More to the point, will SHOP stock continue to plunge after Citron Research’s recent call for a $60 price target?
In other words, would these shorts make any money at all if they hadn’t announced their position to the media? I have to think that the best shorts sellers and traders alike hold their positions close to the vest. (Even I don’t give out my best stuff for free, after all.)
Skepticism aside, as an options trader, I am also thankful to short-selling research firms like Citron. They provide excellent opportunities for profitable rebound trades once the hype of the news has worn off. I believe the same opportunity exists for Shopify.
Remember Citron’s short call on Netflix back in September 2015? If you’d gotten in when they issued their short call, you’d be up more than 70% right now. Even better, if you’d bought into bitcoin back on Sept. 1 this year when Ctiron said to short it, you’d be up 21% in roughly a month’s time.
Admittedly, I’m unfairly picking on Citron. Netflix did hit the research company’s $80 target early in 2016, and bitcoin did plunge the week following Citron’s recommendation. But both are up significantly since.
As you might expect, the recent SHOP stock news had a similar effect. SHOP stock went from trading in overbought territory to oversold territory in just a matter of weeks. And all of this with Shopify earnings just over the horizon, creating a short-term opportunity for SHOP options traders.
Wall Street is expecting Shopify to post a loss of a penny per share in the third quarter, on revenue of $165.63 million. Playing to SHOP stock’s favor, it beat expectations significantly in the prior two quarters and another beat here would go a long way toward unwinding short-term negativity.
Speaking of which, there is plenty of bearish sentiment to go around for SHOP stock. Starting with the brokerage community, Zacks reports that 14 of the 25 analysts following Shopify rate the shares a “hold” or worse. This leaves plenty of room for potential upgrades, especially on the valuation front with SHOP stock trading in oversold territory.
Click to Enlarge Furthermore, short sellers currently hold over 3.7 million Shopify shares short, or about 5.6% of the stock’s total float. The recent plunge has clearly brought a round of profit taking with it, however, as short interest dropped 10% during the most recent reporting period. Should SHOP stock move higher once again, we could see more profit taking emerge from this group.
Turning to the options pits, meanwhile, we find that speculative traders all have the same idea: betting on an oversold bounce. Currently, the November put/call open interest ratio rests at a lowly reading of 0.37, with calls nearly tripling puts among options heavily affected by Shopify’s earnings report.
The most popular strike, by far, is the Nov $100 call, where over 8,200 contracts currently reside. The deep-out-of-the-money $120 strike is next in line with about 5,400 contracts in residence.
Overall, November implieds are pricing in a potential post earnings move of about 12.5% for SHOP stock. This places the upper bound at $109.72 — a far cry from pre-Citron territory — while the lower bound rests at $85.28 below support at $90, but still above Shopify’s 200-day moving average.
2 Trades for SHOP Stock
Call Spread: Those looking to bet on an oversold bounce driven by post-earnings bargain hunters might want to consider a Nov $100/$110 bull call spread. At last check, this spread was offered at $3.12, or $312 per pair of contracts.
Breakeven rests at $103.12, while a maximum profit of $6.88, or $688 per pair of contracts — a potential return of 120% — is possible if SHOP stock closes at or above $110 when November options expire.
Put Sell: Alternately, if the recent short selling buzz worries you a bit, then betting on technical support might be the right way to go. A Nov $80 put sell has a high probability of finishing out of the money. At last check, this put was bid at $1.79, or $179 per contract.
As usual with a put sell, you keep the premium as long as SHOP stock closes above $80 when November options expire. On the downside, if Shopify trades below $80 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $80 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.