Shopify Inc (US) (NYSE:SHOP) has a sentiment problem. This is the only real explanation for why the shares have struggled in the past month. Shopify stock is up more than 130% this year, and third-quarter earnings were stellar.
While the company isn’t lacking in either technicals or fundamentals, perception is everything on Wall Street. And that’s bad news for Shopify stock.
Shopify stock’s problems started in October when Citron Research called into question the company’s business model. The short-selling firm, headed up by Andrew Left, called for the Federal Trade Commission to investigate Shopify and questioned its business practices.
Click to Enlarge While the FTC has so far been silent, Shopify earnings were not enough to quell the unease that Left’s questions unleashed on SHOP stock investors. Heading into earnings, Shopify stock rallied to within striking distance of $110.
Despite a street-beating performance, Shopify stock fell more than 13% following earnings as investors fretted over a lack of operational metrics, which to many was taken as a warning sign that Citron’s accusations could have some merit.
The result was that last month’s Shopify Nov $100/$110 bull call spread came quite close to hitting its maximum potential return but failed due to earnings.
Barring an FTC vindication this week, I’m not confident that SHOP stock will top $110 by Friday when this spread expires. If you took profits ahead of earnings, congratulations!
If you got into the Nov $80 put sell position, you’re still going strong and anything short of an official FTC investigation should allow this position to finish out of the money.
Looking ahead to December, the outlook is muddled for Shopify stock. The shares have a strong upside bias due to the holiday shopping season, but deteriorating sentiment and the stock’s floundering near $100 are cause for concern.
Short sellers have been emboldened by Shopify stock’s poor price action, with short interest surging 20% in the most recent reporting period. SHOP stock is also vulnerable to downgrades, as Zacks reports that 13 of the 25 analysts rate the shares a “buy” or better.
As for options traders, SHOP open interest is bullish, but quite thin. There are only about 7,000 contracts currently open in the December series, as speculative traders have pushed their positions out further into next year to wait out the current Citron/FTC situation.
As of now, the December put/call OI ratio rests at 0.55, and many of these calls may be hedges against newly created short positions.
Finally, December implieds are pricing in a potential move of more than 11% for Shopify stock heading into expiration. This places the upper bound at $111, while the lower bound rests at $89. In short, the next month could be a make-it-or-break-it moment for Shopify stock, as a rally above $110 would confirm a bullish trend, while a breach of $90 would confirm the opposite.
2 Trades for Shopify Stock
Put Sell: Playing it safe is the right way to go for Shopify stock options traders. The best way to do so right now would be to consider a Dec $80 put sell. At last check, this put was bid at 86 cents, or $86 per contract.
As usual with a put sell, you keep the premium as long as Shopify stock closes above $80 when December 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.
Put Spread: SHOP stock’s floundering near $100 is cause for concern — there’s no way around it. The shares inability to hold this key psychological level indicates a downward trajectory over the short term, especially given growing bearish sentiment.
Those looking to side with the bears might want to consider a Dec $95/$100 bear put spread. At last check, this spread was offered at $2.04, or $204 per pair of contracts.
Breakeven rests at $97.96, while a maximum profit of $2.96, or $296 per pair of contracts — a potential return of 45% — is possible if Shopify stock closes at or below $95 when December options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.