For the past three months, Shopify Inc (NYSE:SHOP) has been extremely volatile. Since the start of October, SHOP stock has traded as high as $117.07 and as low as $89.35. That’s a 31% swing from top to bottom. What’s more, the problem is only going to continue until Shopify deals with questions about its business practices … one way or another.
Back in October, I highlighted the bullish case for SHOP stock. Shopify earnings were stellar. Shopify stock has had impressive price action so far this year. For all intents and purposes, SHOP stock is a buy.
However, Shopify has a rather significant shadow hanging over its head. And, as we all know, image is everything on Wall Street. Shopify’s problems revolve around questions surrounding its business model. Citron Research brought these issues to the forefront back in October when it called for a Federal Trade Commission investigation.
Click to Enlarge As a result, Shopify stock has endured a rapid ebb and flow, with bullish traders snapping up SHOP on pullbacks, while the bears sell heavily on any significant rally. An FTC investigation would help settle the matter, but, as Dana Blankenhorn said last month, such a move is likely not on the horizon. In fact, another foreign government agency may step in before the FTC acts.
In the end, this has only added to the uncertainty surrounding SHOP stock … and Wall Street doesn’t like uncertainty.
There is plenty of uncertainty surrounding Shopify stock right now, and you need look no further than SHOP January 2018 options to find it. Currently, the front-month put/call open interest ratio rests at 1.20, with puts in firm command of Shopify’s January options.
Peak January put OI rests at the deep out-of-the-money $80 strike, while peak call OI lies at the overhead $110 strike. There is a clear divergence here, with SHOP options traders looking for deep out of the money protection against further fluctuations in the shares.
What’s more, January 2018 implieds are pricing in a potential move of more than 8.6% for Shopify stock. Implieds are well above historicals, and are quite surprising on a $100-plus stock — especially since Shopify has no major news events on the horizon to directly impact the shares. In short, we see the shadow of Citron’s accusations lingering over Shopify, creating a high volatility environment for the shares.
The end result is that January 2018 implieds are pricing in a potential rally to $113 or a potential plunge to $95 heading into expiration. Furthermore, any news from the FTC (unlikely) or any other investigative agency could further exacerbate the situation — making picking a direction for a Shopify options trade a bit challenging.
Two Trades for Shopify Stock
Put Sell: The safest bet for playing Shopify options right now is to follow the crowd and sell deep out-of-the-money put options. Once again, the Jan 2018 $80 strike should finish out of the money, barring any major developments.
At last check, the Jan 2018 $80 put was bid at 18 cents, or $18-per-contract. As usual with a put sell, you keep the premium as long as Shopify stock closes above $80 when January 2018 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.
Strangle: For those with a bit higher tolerance for risk, a strangle play is one way to make Shopify’s volatility work to your advantage. A strangle involves the simultaneous purchase of an out-of-the-money call and an out-of-the-money put (with both strikes typically just above and below the stock’s current price). This options strategy allows the trader to take advantage of a large move in the underlying stock regardless of the direction.
At last check, the Shop January 2018 $102/$106 strangle was offered at $7.36, or $736-per-pair of contracts. Breakeven for this trade lies at $11.36 on the upside and at $96.64 on the downside. With implieds pricing in a move to either $113 or $95, there is plenty of room for profit taking on either side of the bull/bear coin heading into the new year.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.