Don’t let the bears fool you, Shopify (NYSE:SHOP) continues to look great. But if it’s profits you’re after, bullish investors should be well-served using a nicely placed, modified butterfly spread for stronger risk-adjusted returns in SHOP stock. Let me explain.
SHOP stock is a leading cloud-based, multi-channel e-commerce platform for businesses of all sizes and designs. The company is also one that has been growing by leaps and bounds and continues to look great on and off the price chart; well, except to the resident bear population in Shopify shares.
Short sellers make up about 9% of SHOP’s float. And if you’re bullish, the amount of bears betting against Shopify, which includes the somewhat notorious Citron Research, isn’t something to completely ignore. The bottom-line though, and despite the fact that Shopify is still in-the-red on paper, SHOP stock bears are also still facing an unprofitable uphill battle.
SHOP Stock Weekly Price Chart
On the weekly price chart, SHOP stock remains in an uptrend with its series of higher highs and higher lows. But will that pattern continue? This strategist doesn’t see the rally in Shopify as being over just yet. However, bulls may want to be a bit more cautious.
All stocks, even the most successful business enterprises, eventually correct in a severe enough way as to disrupt the existing trend. And with SHOP stock carving out its fourth or maybe a third base depending on a trader’s counting technique, history suggests the odds for a less-friendly trend to emerge are increasing.
For the time being though, we’re willing to see SHOP stock as one with a bit more upside. More importantly, the options market can assist with much stronger risk-adjusted returns and help protect investors in the event that bulls, rather than bears, are doing the covering for once in a long while.
SHOP Stock Modified Bullish Butterfly
For investors agreeable with our bullish, but respectively cautious outlook for SHOP stock, a modified bullish long call butterfly spread is favored. Reviewing the options board, the Aug $175 / $195 / $210 call combination for up to $3.00 with shares near $161 looks attractive.
By modifying the butterfly and making the embedded bull call spread wider than the bear vertical component, this bullish trader doesn’t have to worry about SHOP overshooting the spread and forfeiting the debit. In this instance, if Shopify shares were above $210 at expiration, the trader would walk away with $2 in profit.
Given an earnings catalyst in late July, this type of upside insurance, while maintaining downside exposure to just more than 1.50% of the risk associated with buying SHOP stock, is certainly a nice feature. However, and just like a regular long butterfly, we’d rather see bears get beat up a bit less, have Shopify land squarely at $195 and enjoy a much healthier profit of $17-per-spread.
Disclosure: 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.
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