History may not repeat, but if it rhymes it’s a great time to buy Shopify Inc (NYSE:SHOP). However, for bullish investors looking for an added layer of support and security above and beyond what you’ll find off and on the Shopify stock chart, a bull call spread is a smarter play. Let me explain.
Not much has changed for Shopify in the month since writing a favorable, but cautious, article about the e-commerce solutions platform. That’s not to say shares of SHOP aren’t lower. In fact they’re down nearly 15%. Nevertheless, the company has been on an impressive growth tear the past couple years and there’s little reason to believe that’s going to change anytime soon.
Bottom line, today’s burgeoning “do-it-yourself” small and medium-size business vendors, who Shopify caters to, aren’t about to quit the burgeoning and decentralized, “sharing” economy — and one with the earmarks of a full-blown secular trend.
Moreover, Shopify is not a one-trick pony either. The company has been building out its higher-end service Shopify Plus and adding market heavyweights such as Ford Motor Company (NYSE:F) and Cummins Inc. (NYSE:CMI) as customers.
Yet some remain unconvinced that Shopify is a legitimate business. Short seller Citron Research remains the most vocal bear. Citron’s front man Andrew Left, most recently slammed the company for its dependence on Facebook, Inc. (NASDAQ:FB) in late March on the basis the company’s new data policies will impact Shopify’s ‘opportunist’ merchants.
Having said that, if history rhymes Shopify bulls are in good shape. First, contentious names like SHOP have enjoyed their share of success. Amazon.com, Inc. (NASDAQ:AMZN), Tesla Inc (NASDAQ:TSLA) or Netflix, Inc. (NASDAQ:NFLX) are great examples of companies that have defied or even buried plenty of naysayers over the years.
Secondly, when it comes to shorting bigger prey with larger market caps such as Shopify stock and away from micro and small cappers, Andrew Left’s bearish calls have been far from consistently profitable. And often enough, they’ve turned into much better buying opportunities, sans a very timely and highly profitable short in Valeant Pharmaceuticals Intl Inc (NYSE:VRX).
Lastly, if the price history on the current Shopify stock chart rhymes, bullish investors look to be in very good shape as we’ll see below.
Shopify Stock Weekly Price Chart
The 27% corrective pullback that Shopify stock has experienced over the past month may have bulls seeing double or maybe a rhyming situation that could prove very opportunistic for getting long SHOP stock.
Additionally, Shopify has the backing of its uptrend which remains intact and appears to be finding a bottom slightly above the 40-week simple moving average while testing the prior base breakout for support.
Combine that with the fact corrections of 20% to 30% are generally normal and healthy price action for growth stocks like Shopify, and the option to shop for a bullish spread on SHOP stock is an attractive proposition.
Shopify Stock Bull Call Spread Strategy
For like-minded investors who see sufficient evidence of a bottom in Shopify, one options strategy to profit from upside and avoid increased risk exposure on the downside if our “rhyming double” fails to hold, is to use an out-of-the-money bull call spread.
With Shopify stock at $118.95, the July $130/$145 bull call spread for $4 is attractive. As with all verticals, this spread reduces and limits risk. In this instance, the trader is held to 3.36% of the risk associated with buying SHOP shares through July expiration.
If conditions permit and the price action in Shopify stock is cooperative, above $145 the spread can expand to $15 and offer $11 in profits. Alternatively, taking profits or adjusting into a lower risk spread along the way if the opportunity presents itself prior to expiration, is always a smart move to at least consider in a market where the bull may be running on fumes.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.