Shopify Inc (NYSE:SHOP) stock is falling this morning on headlines that have little to do with its own operating conditions. Nevertheless, the stock has been on fire keeping up pace with the likes of Amazon.com Inc. (NASDAQ:AMZN). Even after this dip, SHOP is still up 30% year-to-date so the trajectory is likely to remain intact for now.
Last night we learned that Adobe System Incorporated (NASDAQ:ADBE) is buying Magento Commerce which is a SHOP competitor. Investors understandably sold SHOP in a knee-jerk reaction. The bearish idea here is that the new combination with ADBE will present fiercer competition for SHOP.
But often enough these dips on headlines are opportunities for midterm bounce trades. Yes, SHOP will have stiffer competition but its fundamentals should continue unchanged. So the bull thesis remains intact and fans of the stock will defend it.
And therein lies my opportunity. Support in Shopify stock will hold as this headline fades. I consider this a tactical trade, not an investment, so I will have tight stops if my thesis proves incorrect.
Fundamentally, SHOP is not cheap but this is not a stock where I look for value. This is a growth story so I consider it a momentum mover. It runs fast in either direction so it’s a scary knife to catch. So, I use options where I can limit my risk.
We are now living in a web-based world so services from companies like SHOP will be in high demand for years to come. So there will likely be enough room for all providers to prosper. Stiff competition from ADBE will likely make SHOP even better.
Click to Enlarge This morning’s dip brings Shopify Inc to a level of contention for the past three months. Those often act as support on the way down.
But even if it fails, the area around $125 per share should act as even-better support. So as long as the macroeconomic conditions remain bullish, SHOP stock will find footing sooner rather than later.
I believe more in the downside support than the upside potential so I sell downside risk into today’s fears.
This is not to say that it doesn’t have any bounces coming, but in a headline trading environment where the stock market, in general, is near all-time highs, I feel better betting on support then hopium.
The Bet: Sell SHOP June 22 $118 put for $1. Here I have an 85% theoretical chance of success. Otherwise and if the price falls below it then I would suffer losses below $117.
Selling naked puts carries big risk especially for a stock as frothy as SHOP. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell the SHOP June 22 $120/$118 credit put spread which would deliver over 15% in yield but with much smaller risk. Both setups have about the same odds of success and neither require a rally to win.
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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.